United States Fiscal Cliff FINAL V1

United
States Fiscal
Clif
LU I S DA N I E L O RT I Z C O BO S 1 3 8 2 9 0

Prof. Einar Moreno
Managerial Finance

J O S E P H G E E RT E N G E R R I T S 4 0 1 5 3 0
S T E FA N I E M A R I A B AC K E S

401573

SOUFIANE BENDENNOUNE 401453
September 18th, 2014

Agenda
1

Key Facts

2

Fiscal Clif

3

Propositions

4

Conclusion

BACKES, BENDENNOUNE, GERRITS, ORTIZ

UNITED STATES FISCAL CLIFF

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Agenda
1

Key Facts

2

Fiscal Clif

3

Propositions

4

Conclusion

BACKES, BENDENNOUNE, GERRITS, ORTIZ

UNITED STATES FISCAL CLIFF

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The US fiscal clif was developed due to the continous deficit of the United States federal budget US fiscal year: October 1st – September 30th

2008 financial crisis 2010

2011

2012

Revenue
2.165 trillion USD

Revenue
2.6 trillion USD

Revenue
2.450 trillion USD

Spendings
3.8 trillion USD

Spendings
3.8 trillion USD

Spendings
3.537 trillion USD

1.635 trillion

1.2 trillion

1.087 trillion

deficit
(10% of GDP)

deficit
(8% of GDP)

deficit
(7% of GDP)

?

Source: Amadeo, Kimbely: 2014
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The US government ended up in such an high degree of debt due to numerous added events throughout the last ten years
How did we get there?
2000 Dot-com bubble
2001-2009 Bush Tax Cuts
2007 Subprime crisis
2008 Financial Crisis
2009-2013 Obama Stimulus plan

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Agenda
1

Key Facts

2

Fiscal Clif

3

Propositions

4

Conclusion

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The US government is reaching a point of no return on January first, which could have resulted in a new (global) recession
What should we consider?
Budget deficits
Rate of employment
Economic growth
Social aspects
Political cooperation

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The US government decided the following three measures to be most important in decreasing the deficit No v2 012

Debt ceiling Late 2012
De
c2
012

US
´s f sca l cl if BACKES, BENDENNOUNE, GERRITS, ORTIZ

The total amount the government can borrow to meet its existing obligations

Tax hikes

January 1st, 2013
Jan
201
3

Expiration of Bush tax cu

Spending
Cuts

January 2nd, 2013
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Agenda
1

Key Facts

2

Fiscal Clif

3

Propositions

4

Conclusion

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Go of the clif scenario
Budget Structure 2012 in trillion dollars
1.1

Goal

2.5

• Spendings cuts : 100 Billion $
• Taxes increase : 400 Billion $
3.6

Spendings

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Revenue

Deficit

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If the government would take no action, it would take the fall of the clif
2013 Budget Deficit

Measures
• Spendings cuts (sequestration) under the
Budget Control Act of 2011

0.5

• Expiration of the Bush tax cuts

3

• Expiration of 2% FICA payroll tax cut

3.5

Spendings

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Revenue

Deficit

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Which would dramatically decrease the deficit, which sounds like an optimistic idea
2013 Budget Deficit

Consequences
• Due to the expiration of tax cuts revenues increase by $400 billion

0.5

• Economic growth increase revenues by $100 billion  Total revenues will then be $3 trillion

3

• Spending cuts lead to a decrease of $100 billion is spendings
 Total spendings will then be $3.5 trillion

3.5

 The deficit goes down to $500 billion
Spendings

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Revenue

Deficit

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However, it does bring difficulties which could put america through an second economic depresssion Economic growth

Unemployment

Public debt

The economic growth will be -0.5% instead of an initial growth of 1.7%

Unemployment rate will be of 9.1% instead of
8% for 2014

The public debt will decrease from 85% of
GDP to 58% of GDP by
2022

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In 2013 the democrats under Obamas government wanted to increase the spendings to
$3,8 Trillion
Budget Structure 2012
1.1

Goal

2.5

• Increase spendings to $3,8 Trillion

3.6

Spendings

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Revenue

Deficit

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The democrats wanted to increase taxes for the wealthy citizens and “protect” the middle class
2013 Budget Democrats

Measures
• Extend the Bush Tax cut for the middle class •  families with an income < $250.000
•  individuals earning less < $200,000

0.9

2.9

• Not extend the Bush Tax cuts on the rich people • Include a few other tax increases on the wealthy citizens

3.8

Spendings

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Revenue

Deficit

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The democrats reached a deficit reduction thanks to economic growth and tax increases
2013 Budget Democrats

Consequences
• Revenue increase of $300 Billion

0.9

• Due to the extension of tax cuts for the middle class  loss of $200 Billion of revenue 2.9

• $2,9 Trillion in revenues  $900 Billion gap
• BUT: Deficit reduction of $200 Billion
a $100 Billion came from economic growth and the rest due to the increase of the taxes

3.8

Spendings

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Revenue

Deficit

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On the other side, the United States republican party concentrated on diferent aspects to deal with the fiscal clif
Budget Structure 2012
1.1

Goal

2.5

• Waive $3,18 Trillion in revenues by extending tax cuts. This revenue would be generated mainly by reducing tax expenditures and cutting spending

3.6

Spendings

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Revenue

Deficit

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They aim to keep former regulations and combine them with spending cuts in the future
2013 Budget Deficit Republicans

Measures
•

Extend the Bush tax cut overall on income, investments, married couples and families with children. •

Cut spending for health care providers and increase medicare costs for higher-income beneficiaries •

Cut agency operating budgets and other miscellaneous spending

•

0.9

2.6

3.5

Use a lower rate of inflation to calculate government benefits such as social security.
Spendings

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Revenue

Deficit

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Which would end up on a deficit decrease due to an increase in revenue
2013 Budget Deficit Republicans

Consequences
• Tax revenue would increase $800 billion over the next 10 years

0.9

• A cut on health care from $600 billion in the next 10 years

2.6

• Deficit cuts of $300 billion through agency operating budgets and other miscellaneous spending cuts
• Reduce deficits by $200 billion over 10 years by reducing social security cost-of-living

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3.5

Spendings

Revenue

Deficit

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Agenda
1

Key Facts

2

Fiscal Clif

3

Propositions

4

Conclusion

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So, what did the US government do?
No real solution is found, but rather a short-term prevention

No general tax increase

Increase in tax for richest 2%
Measurements
made to prevent the fiscal cliff
Extending credit to stimulate economic growth

Cut in government spending

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And what do you think?

How would you have solved the financial crisis? Or which party do you believe has the best approach to solve the financial crisis?
Additionally, do you believe the solution offered is a good one, or only a tool to postpone future decisions

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