United States of America: the end of unlimited spending and alarm for investors

      Big changes to the U.S. tax base for the following year became even more inevitable when Democrat Barack Obama  was re-elected for a second presidential term. Cost cutting and tax raising in the United States is likely to shook  portfolio of investors  and the world's largest economy will return to recession.

    One of the biggest headaches for investors has been a slow but firmly in a debt quagmire running U.S. economy. This is due not only to the country's excessive desire to spend a lot of money for the fight against terrorism, but also temporary tax relief, which was for a decade. For these reasons, in 2009 the U.S. recorded a far 10% of the budget deficit and for the first time in U.S. history solvency risk has gained not only theoretical but also practical value - investors realized that the United States may actually go bankrupt. However, debt increasing and spending a lot can be stopped at least in 2013, when the law will enter  into force for country to raise taxes,  cut spending and reducing the budget deficit.

    Two evils

   Just over a decade alarmingly from 32% to nearly 70% bloated U.S. debt to gross domestic product (GDP)   requires action, because in the long run public debt can become out of control. To deal with that it was brought  the fiscal discipline against the abolition of tax relief in 2013, 1^st of January, and it is welcome and may possibly contribute to what investors had not seen since the presidency of Bill Clinton's era - U.S. non-deficit budget. However, it will certainly have dire economic consequences so this change in the tax base would be baptized fiscal cliff and a result of that it means the end of the tax relief and spending cuts mix. Fiscal cliff threat can be easily imagined  when we realize that every working person's income tax rate jumps by 4-5 percent  points (depending on the level of income), capital gains taxes will grow by 5 percent points and the costs of defense programs will be reduced by almost 10% - and that's just beginning a long painful list. These increased taxes only through 2013 would collect additional 350 billion USD (939 billion. £) and would up almost 3% of the U.S. total annual GDP. The belt tightening would make a  damage for U.S economy, which has not already recovered. It is calculated that if it would be such a scenario, the economy will stand back about 0.5%, while unemployment will back to the 9.1% level. So on one hand we have a growing unmanageable debt, on the other - the recession.  To sum up, for which of these evils  American policy is shifting  and what  American investors should expect from it ?

  Respublicans scenario

   Usually half of the investors ideologically is closer to the Republican position, which is more favorable to investors than the Democrats position. Economy does not achieve required acceleration and as a result of that former presidential candidate Mitt Romney insisted his party position to extend tax relief futher at least for a while. It is obvious that greatest achievement for investors  would be a delay of unpopular and difficult decision  at the stock market. In the short term this would have a positive impact on the consumption targeted sectors and would let to banks to have a possibility to improve home loaning sector.

Democrats scenario

   Not so many days ago it became clear that the president will continue to be Democrat Barack Obama and as result of that it must be considered that at least for the time being him a president the initiative of addressing the generated problems will be exactly in the hands of Democrats party, what means that it will be considered to cut expenses and to introduce bigger taxes. Everyone recognizes that the country need to save now and the only question is what areas will suffer from it the most. The best way to save money would be cutting of war industry market. Moreover, it could be introduced progressive taxes and as a result of that richer society would get more money to government.

    While the options are still debated, we can be almost certain that in 2013 U.S expenses are likely  to start cutting and taxes will increase for everyone despite people’s  level of living. To conclude, it is clear that dreamland isn’t as powerful as it was a few decades ago.

Jevgenij Polonis

[artigo de opinião desenvolvido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]