(By Mani) The term "fiscal cliff" seems to be the buzzword of U.S. investors and the common man as relates to the expiring tax cuts at year-end and required spending reductions that would have wide repercussions across the economy. The investors are concerned about whether the "fiscal cliff" will weaken the already fragile economy.
Both major U.S. political parties have strong political motivations to avert the potential political fallout from an economic recession if the U.S. falls off a legislatively avoidable "fiscal cliff" amounting to around 3 1/4 percent of U.S. GDP.
"We believe the will of the voting public will prevail on elected representatives, especially most of the 435 House of Representatives members up for re-election again in the autumn of 2014," UBS economist Maury Harris said in a note to clients.
Harris' conviction about the bipartisan political necessity to avert a "fiscal cliff" is enhanced by a recent October 12-14 United Technologies/National Journal Congressional Connection Poll survey of 1,006 adults nationwide.
By almost a 4-1 margin respondents believe that the large potential automatic cuts in defense and domestic spending programs are a bad idea.
By nearly a 2 1/2-1 margin, respondents want their lawmakers to compromise rather than standing by their principles on addressing the federal budget deficit.
If there is no budget agreement, 61 percent of respondents would blame all parties equally, 18 percent would blame Congressional Republicans, 10 percent would blame President Obama and 6 percent would blame Democrats in Congress.
"The accompanying uncertainty over just who would get blamed should motivate most members of Congress to cooperate in averting the "fiscal cliff," Harris noted.
The public mostly opposes specific cuts in government spending. However, there is general support for raising taxes on high-income families. If the ultimate solution to the impending "fiscal cliff" follows along these lines, experts feel a longer-term deficit reduction program that is backloaded, short on specifics and likely not credible to either bond investors or the rating agencies.
"In our view, raising taxes on the affluent is hardly a sufficient source of very significant longer-term deficit reduction," Harris said.
In the current setting, either victorious political party in the upcoming November elections has strong political motivations to avert the "fiscal cliff".
The economy is far more important than the Federal budget for determining Presidential votes. Warnings from industries such as defense about the perils of a "fiscal cliff" must be a key consideration for politicians.
In fiscal 2013, the "sequestered" defense spending cuts in the Budget Control Act of 2011 would trim 589,000 jobs."Swing" states such as Virginia would likely be particularly hard hit, according to an October 2011 Aerospace Industry Association sponsored study by economist Stephen Fuller.
According to the statements of various Republican Congressional leaders and the presumptive Republican Presidential nominee Mitt Romney, the Republicans would avert a "fiscal cliff" by extending all of the expiring Federal income tax cuts, raising defense spending and probably cutting existing tax rates.
Though, a new Congress and President will not be sworn in until early January, the current Republican House of Representatives undoubtedly would again pass a temporary extension of the expiring Federal income tax cuts and probably would vote to postpone implementation of the spending reductions currently mandated in the Budget Control Act of 2011.
Moreover, a President-elect Romney would have every incentive to reduce business uncertainty by promising to enact specific actions to avert the "fiscal cliff".
On the other hand, if President Obama is re-elected, the Democrats probably would retain Senate control. They may not be able to recapture the 435-member House of Representatives, where the Republicans currently hold a 50-seat majority.
However, if President Obama wins, there could be a few dozen seats lost by the Tea Party wing of the Republican party, and this should spell less fiscal political gridlock with a re-elected President Obama.
"Another argument for avoiding the "fiscal cliff" is that investors in the U.S. government bond market probably will not be enforcing much U.S. fiscal discipline. The fixed-income alternatives in either most European government bond markets or the U.S. MBS markets likely will remain limited," Harris said.