Who says fiscal woes and the pressure of an election year are only raising concerns about Pakistans economy. Even the worlds biggest economy is headed to elections on November 6 this year, and a fiscal cliff. Is the fiscal cliff\ some rock piece created by the Congress highlighting how the fiscal side of the US economy fares? Not exactly, but it does narrate a climax-infested story of what the US economic managers will be facing at the end of this fiscal year. On December 31, 2012, the Bush-era tax cuts will expire, along with $1.2 trillion in spending cuts. If the US Congress does nothing about this impending fiscal cliff, it will be facing a fiscal contraction of roughly $600 billion in 2013. Thats nearly four percent of GDP, probably enough to send the US economy back into recession. IMF among international financial institutions has warned inaction could pose negative outcomes for other countries as well. "Even if Congress scraps automatic spending cuts and tax rises, economists forecasts for 2013 growth of 2.4 percent look optimistic, given some fiscal tightening seems unavoidable," declared Financial Times. But theres a catch-22 situation to this. If the tax cuts are extended and spending cuts are cancelled, the country would end up piling too much in the debt department, which could be detrimental to the economy in the long-run. Lets not forget how an impasse on the decision to raise the debt ceiling last year led to the first-ever credit downgrade of the US, leading to much furore in global markets. With elections looming around only after 4 months, US policy makers appear severely bootstrapped for both time and fiscal resources. The Funds recommendation to the US urges them to focus more on the fiscal crisis they could be facing and its effect on GDP growth. "We believe that fiscal consolidation is necessary but not any fiscal consolidation. It has to be sensible and certainly not excessive," Christine Lagarde, IMF Managing Director, was quoted by FT, earlier this week. As for the debt predicament, the IMF has advised US lawmakers to raise the debt ceiling in order to avoid further uncertainty about the US economy, and to prevent a stalemate similar to situation last year over the down grading of US sovereign credit rating. Yet, the debt issue is also a serious one and should be addressed in the medium term, though for the coming months, the resolution of the fiscal cliff should take precedence. US legislators will be embroiled debating a short-term and medium-term response to looming debt and growth tradeoffs; the incoming government will also face tough choices, come November.
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