"Financial cliff " is a situation when government o f the USA decides to permit so huge austerity that can damage financial system over the worl

Bugaev, D. S.

Grineva, N. A.

DSpace at Belgorod State University

Секция 9S O C IA L  AND ECO N O M IC  D EV ELO P M EN T  O F  R EG IO N S  IN R U S S IA  AND A B R O A DT H E  IN FLU EN C E O F TH E FISCAL C LIFF ON TH E ECO N O M Y  O F TH E USAD.S. Bugaev, I\.A.Grine\’a Belgorod, RussiaAttention to financial m arket participants are now  concentrated  entirely in anticipation o f  the debate over the issue o f  "financial c l if f ' in the U.S., one o f  the key threats to the global econom ic recovery in the near future.The so-called "financial c liff ',  o r failure o f  the term ination o f  tax benefits o f  approxim ately S 700 billion, coinciding with a  reduction in governm ent spending, it could happen as early  as the beginning o f calendar 2013, i f  C ongress is unable to change the legislation. Failure to prevent the tightening o f  fiscal policy can  strike enough to push the econom y back into recession (reduction in G D P growth to 4 .25% )."Financial c l if f ' is a situation w hen governm ent o f  the USA decides to perm it so huge aus­terity  that can dam age financial system  over the world. Recession in the USA every tim e affects on the global econom y like crisis o f  2008.The austerity crisis's policies, by cost in 2013-  Bush tax cuts ■ AM T patch  Payroll tax cut *  Business tax cuts «  Stim ulus tax cuts Sequestration  Unem ploym ent insurance  M edicare doc fixThis chart represents the structure o f  the austerity  crisis. The main part o f  it is taxes:- 2001 /2003 Bush tax cuts.- 2009 stim ulus.- Payroll tax holiday.- A lternative M inim um  Tax.- Extenders.T he second part is spending cuts:- The sequester.- Budget caps.- Doc fix. The cuts, know n as the “Sustainable G row th Rate” or SGR, require that grow'th in p rovider paym ents not exceed grow th in Gross Dom estic Product.642- U nem ploym ent insurance.M oreover, there is one m ore essential elem ent debt ceiling. W hen exactly  the debt ceiling is nex t reached depends on how  m uch the governm ent actually  spends and taxes in the com ing m onths. But m ost analysts think the next debt-ceiling increase will com e due around February. The Bipartisan Policy C en ter estim ates « 'ill have to raise the deb t lim it by anyw here betw een $730 b il­lion and $1.25 trillion to avoid the deb t ceiling fo r all o f  2013 (depending on w hether the Dec. 31 fiscal changes m easures are enacted  o r not) and betw een S1.3 trillion and $2.2 trillion in 2014.How much would the debt limit need to be increased to get through 2013 or 2014?$2,500 $2,000 S $1,500$1,000$500 $0E nd o f  2013  E n d  o f 2014Low Estimate »  $750 8High Eftimate “  >$1,250 ВEitlm ete a $2,200 ВThe consequences o f  the governm ent USA decision can be:1) Analytics expect recession because US econom y m ight shrink by 0.5 percent in the next year, unem ploym ent rate can be a t level o f  9,1 perccni that will be h igher than current level -  7.9 percent.2) Deficit reduction. In a  short and m edium  run the deficit w ill be reduced because o f  reduc­tion o f  expenditures and tax hikes. The CBO considers that public debt will fall to only  58 percent o f  G D P by 2022. H ow ever, if  the governm ent follow s their policy the debt w ill be 90 percent o f  G D P. This situation presents on the chart below.3) Tax increases. C BO  estim ates that i f  US governm ent goes over the fiscal cliff, average tax bill will rise by 3,446 S in 2013.In the curren t situation D em ocrats and R epublicans w ant to prevent the spending cuts as well as recession. They also w ant to prevent the tax increases. How ever, D em ocrats w ant to throw out the Bush tax cuts for incom es over 250,000 and the R epublicans w ant to keep them  in placc. T he Bush tax cuts for incom es below  $250,000 still benefit people who m ake m ore than $250,000, because those are tax cuts on every dollar earned p rior to the 250,000th dollar.In this case  w e can use tools o f  a gam e theory and m ake the p ay o ff matrix:Republicans agree to expire Bush tax cuts for incomes over $250,000Republicans refuse to expire Bush tax cuts for incom es over $250,000Dem ocrats agree to preserve Bush tax cuts for everybody8. 0  (not possible) 5, 10Dem ocrats refuse to preserve Bush tax cuts for incomes over $250,00010.5 8 ,0643W e have chosen these strategies because the governm ent cannot ju s t go over the fiscal cliff, in that case there w ill be a recession and deb t ceiling  problem  and they actually  cannot do nothing. Less likely  that they  ju s t go over the fiscal c lif f  and m ake a deal in the end. It m eans that the gov­ernm ent w ill w ait for ending o f  tax benefits, in this case taxes autom atically  go m uch higher than e ither party  w ants and w ith  this result they can find a  w ay how to reduce them  m ore easily.Now  we can m ake assum ptions:1. T hese are the on ly  strategies available  to  both players, and each player has to  pick ju s t one o f  them .2. T he num bers accurately represent the political outcom es associated with each com bina­tion o f  strategies,3. T he party  leadership w ants to m axim ize their ow n political p a y o ff (i.e. they are narrow ly self-interested, not w illing to fall on any sw ords for the good o f  the country), and4. Both parties are aw are o f  each o th e r’s strategies and corresponding payoffs (i.e. all po liti­cal inform ation is perfect and com plete)Let’s look at the top-left cell: in this case each side insists the o ther gets w hat it wants and the sam e result you can see at the bottom -right cell, because tw o sides could not com e to an agreement. How ever, it was m entioned that it w'ould never, ever happen, because the parties just never do that.B ottom -left outcom e: This is w hat w ould  happen i f  the Republicans caved in to the D em o­crats: the tw o sides agree to extend the Bush tax cuts on everybody except for incom es over $250,000. T he fiscal c lif f  is (m ostly) averted, but taxes go up on the really  high-incom es. This m akes the D em ocrats look aw esom e, because they  got exactly  w hat they w anted the rich pay their fair share, taxes do n ’t go up on the poor and m iddle class, and the U.S. doesn’t fall into a re ­cession —  so D em ocrats get a big p ay o ff — 10 points. M eanw hile, the Republicans begin to look silly , not only because they look like w im ps but also  because m any have v iolated the G rover Nor- quist tax pledge, so they get a  sm all p a y o ff—  5 points. But, like the D em ocrats in the top-right ou t­com e, the ir p ay o ff isn ’t zero, because a fter all, the fiscal clitT has been (alm ost) entirely  averted, nobody sees a big tax increase  except fo r a sm all num ber o f  people a t the  very  top o f  the incom e distribution, and even those h igh-incom e earners m anage to avoid the scheduled tax increases on the  incom e they earn before the  250,000th dollar, (and nobody cared about that G rover N orquist s tu ff  anyw ay). Total payoffs: (10, 5).B ottom -right outcom e: This is w hat happens i f  the tw o sides c an ’t com e to an agreem ent, and is arguably the m ost interesting case. In this situation, both sides refuse to give in —  the D em o­crats insist on expiring  the B ush tax cuts for top incom es, and the R epublicans refuse to let that happen —  so w e go over the fiscal c l if f .  E verybody’s taxes increase, including those at the top  o f  the incom e distribution. B ut as 1 have it here, the D em ocrats still get a big p a y o ff (8 points), and the R epublicans get an even w orse payoff than i f  they ’d caved in (0  points). Because, w hat would im ­m ediately happen i f  w e w ent over the fiscal cliff? The D em ocrats w ould im m ediately pressure the R epublicans to cut taxes on the lower and m iddle-incom e earners —  i.e. to push everybody below  the top o f  the incom e distribution back up onto the c liff  —  and the Republicans would have no choice but to go along w ith  it. In this case  the R epublicans don’t get what they w anted — taxes on the h ighest incom es have gone up, by  even m ore than  if  they ’d ju s t caved in —  and the Dem ocrats get alm ost w hat they w anted, i.e. a  tax increase on the  highest incom es but not on anybody else, (■‘alm ost” because there would be a b rie f and irreversible period betw een January  1 and w henever R epublicans agreed to low er taxes w hen taxes w ould go up on everybody, w hich is not what the D em ocrats w ant, and certain ly  w orse than the bottom -left outcom e). Total payoffs: (8, 0).B y now  it should be clear, intuitively, the bottom -left outcom e is the N ash equilibrium : i t’s the best that R epublicans can do, given the options available to the Dem ocrats.C onsequences o f  the fiscal c lif f  d ilem m a for oil m arket. D espite the fact that the U.S. go v ­ernm ent after the re-election  o f  O bam a is com partm entalized, the basis o f  our baseline scenario is the follow ing assum ption: the U.S. econom y m anages to avoid the p roblem  o f  "financial c l i f f  be­cause both parties (D em ocrats and R epublicans), in the end, find a tem porary com prom ise and postpone the solution for the future. H ow ever, we continue to believe that the uncertainty regarding644the "financial c lif f ' w ill put dow nw ard p ressure, the  m arket will be m ore careful, w hich will reduce the average cost o f  B rent to $ 109/barrel in Q4.The short-term  effect that the U.S. econom y is still faced w ith the problem  o f  "financial cliff" and the dem and for oil w ill drop by  800 thousand, could  lead to a sharp drop in com m odity prices (other things being equal) by about 35% , to  $ 75/barrel B rent (on the basis o f  short-term  elas­ticity  o f  dem and). B aseline scenario -  "postponing in the closet" -  can still cause short-term  seli-o ff in the oil m arket.130— В м е  # л е  Sc m m Io  CNtf V t n M i e130 noU  КШI  30&  903S  70 «3 SO 40In that case, i f  the politicians have draw n conclusions based  on last year's events, then du r­ing the "lam e duck session" (the last session o f  the Senate o f  the current convocation) can avoid the deterioration  o f  perception o f  risk. H ow ever, the risk that w e will see m ore in tricate political process, w hich can cause significant short-term  sales o f  risky  assets, including oil. In this case pric­es from  tim e to tim e can significantly  low er than the average forecast. It m eans that incom es from selling oil can be declined in the nearest future and Russian governm ent will have to  lay on it too much and seek another possibility  for boosting their budget and m ake all social program s w orking.R e fe rences1. Легких реш ений не бывает: Европа в состоянии самоотказа, СШ А на грани "обры ва", что ждет Россию ? [Internet resource] // Online. URL: h ttp://w w w .finam .ru/analysis/forecasts0135B/default.asp.2. "Ф инансовая драма" в СШ А может вызвать резкое падение цен на нефть [Internet resource] // O n­line. URL: http://w w w .nnam .ru/analysis/forecasts0135B/default.asp.3. "Fiscal c lif f ' clock ticks, political battle rages [Internet resource] //  Online. URL: http://w w w .cbsnew s.eom /830l-250_162-57556679/fiscal-cliff-clock-ticks-political-battie-ragcs.4. GO P's $4.6T 'fiscal c lif f  counterproposal rebuffed [Internet resource] // Online. URL: http://w w w .usatoday.com /story/new s/politics/2012/12/03/gop-cliff-counteroffer/1743307/5. The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ [Internet resource] i! Online. URL: http://w w w .usatoday.eom /story/new s/nation/2012/l I /14/fiscal-cIifT71703017/.6. W hat is the Fiscal C liff? [Internet resource] // Online. URL: http://bonds.about.com /od/Issues-in-the- N e ws/a/W hat-I s-The-Fiscal-C  li ff. htm7. W hat Will the Fiscal C liff  Cost Y ou? There's a Tool for That [Internet resource] / /  Online. URL: http://ww w.businessw eek.com /articles/2012-12-03/what-w ill-the-fiscal-clifT-cost-you-theres-a-tool-for-that.8. Will U.S. go over the fiscal cliff? [Internet resource] //  Online. URL: http://w w w .w ashingtonpost.eom /blogs/w onkblog/w p/2012/l 1/27/absolutely-everything-you-need-to-know-about-the-fi sea I-с 1 i ff-i n-one-faq/.645

The influence of the fiscal cliff on the economy of the USA

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The influence of the fiscal cliff on the economy of the USA

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