B S Raghavan

American fiscal cliff-hanger

B.S.RAGHAVAN | Updated on January 03, 2013

The frenetic hurly-burly witnessed in the past few weeks to resolve the fiscal ‘gridlock’ (deadlock) that had paralysed the US Administration and the US Congress is by no means the first of its kind.

Such gridlocks occur from time to time and have in the past even resulted in the closing down of all government departments for a few days due to the blocking of funds by the US Congress.

For instance, there were two total shutdowns of US Government in 1995 and 1996 following the vetoing by President Bill Clinton of the Financial Bill adopted by the US Congress without regard to the US Administration’s proposals.

A 2010 study by US Congressional Research Service casts lurid light on the costs and implications of the shutdowns.

‘Government by gridlock’ is in a sense built into the US Constitution. It has made the separation of powers among the three branches of Government so clear-cut and exclusive that differences in policy planks and approaches result in confrontations, especially when a political party different from the one to which the President belongs has a majority in the Senate and/or House of Representatives.

The stridency they assume is explained by the ideological complexion of the Democratic and Republican parties (the only parties which count in the American political system).

The former is usually taken to be liberal, with affinity for the poor and the underprivileged, international in outlook, and in favour of proactive Government intervention to promote economic growth and social welfare. The common perception of the Republican Party, on the other hand, is that it is conservative, class-based, pro-private business, opposed to ‘Big Government’ and aggressive in the pursuit of US-centric goals abroad.


These dichotomies are aggravated when the two parties take uncompromisingly stubborn stands on particular issues.

Feverish negotiations to reconcile them and hammer out a settlement can go on well past the eleventh hour taking the government as a whole to the very brink of a breakdown.

Thus, cliff-hanging, particularly of the fiscal variety, is nothing new to the denizens of the Executive and Legislative Branches in the US. What made the fiscal cliff seem more conspicuous this time was the dire straits to which the US had been reduced by the ravages caused by the financial crisis, the humongous bailouts, the slow pace of recovery and the enormous back-up needed for effectively implementing schemes such as ‘Obamacare’ and making increased investments possible in education, clean energy, and manufacturing.

The Obama Administration had envisaged massive tax reform to augment revenues and wide-ranging ameliorative measures to make life easier for the middle class which, according to a write-up issued by the White House, was facing “a make-or-break moment”.

At the heart of its package for tackling the aftermath of the financial crisis was the decision to ensure that “millionaires and billionaires will pay their fair share to reduce the deficit through a combination of permanent tax rate increases and reduced tax benefits.”

The cliff-hanging was over the Administration’s definition of ‘the wealthy’ at an income of $250,000 and above, and the nature, scope and extent of the spending cuts.

Eventually, at sessions lasting beyond midnight in both Houses, the Congress passed by comfortable majorities the compromise Bill raising taxes for those with incomes above $400,000 for individuals and $450,000 for couples and providing for tax credits for low-income households and college students and continuance of unemployment benefits.


The Bill, however, has put on hold automatic spending cuts in Defence and other government programmes for two months, thereby planting seeds of further discord between the Administration and the Congress in the course of sorting them out. As Obama has rightly pointed out, it is “just one step in the broader effort” towards reduction of the deficit and better revenue and expenditure management.

But “balanced budget” is still a distant dream. The US Administration may have to be engaged in a long and intractable tug-of-war with the Congress involving much “toil, tears, blood and sweat” for perhaps the entire duration of Obama’s presidency before anything like a groundwork for that much sought-after goal can be laid.

Meanwhile, I feel the US can think of a multi-disciplinary mechanism like India’s quinquennial Finance Commission, composed of eminent and independent public figures who are experts in economics, public finance and public administration to go into the vital issues bearing on its finances, conducing to harmonious relations between the US Administration and the US Congress.

America and fiscal cliff

Published on January 03, 2013

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