Never mind Obama, can the House of Congress avert a fiscal catastrophe in the coming weeks?

America's political elite have shown precious little appetite for bipartisan negotiation over the past four years. Yet the looming fiscal cliff demands urgent co-operation


Voting is over in the election of the world’s most powerful politician. Barack Obama has won. Now attention will switch to the question of whether the world’s most powerful economy will commit hara-kiri – and also disembowel the global recovery in the process. Unless members of the US Houses of Congress agree on a new budget settlement in the coming weeks, spending cuts and tax rises worth around $600bn – or 4 per cent of America’s GDP – will be automatically enacted in January.

Researchers at the World Bank estimate that such a massive fiscal consolidation would reduce US GDP by 2.2 per cent in 2013, erasing all the growth that the country would otherwise have registered next year and, in all likelihood, plunging America back into recession. And such is the size of the US, which sucks in huge quantities of goods from the rest of the world, that an American recession would eviscerate global growth, too. If the US goes over what has been termed a “fiscal cliff”, we go over too.

Pretty much everyone agrees that such a colossal budget consolidation in America would be a disaster. A universal clamour has gone up calling for US politicians to do a deal. G20 finance ministers in Mexico this week stressed the need for the US to avoid “a sharp fiscal contraction in 2013”. Yet the rhetoric of many of the world’s most influential economists and policy-makers in recent years might have led the casual observer to a very different view of the impact of cuts and tax rises on this scale.

Until very recently, there was a powerful caucus of opinion in America and Europe that held deficit reduction by countries whose spending exceeded their revenues to be an urgent priority – and that the bigger the cuts the better. They were listened to. G20 leaders who met in Toronto in 2010 solemnly agreed to halve their budget deficits by the end of 2013 (which, incidentally, is almost exactly what the fiscal cliff would achieve – cutting US state borrowing from 7.3 per cent of GDP to 4 per cent).

Dissenters who argued that such drastic cuts risked aborting a weak global recovery and who advised that it would be better to spread the necessary consolidation over a longer period were informed by the champions of austerity that, on the contrary, deficit cuts would be a tonic. In this view of the world, when states cut their deficits, businesses feel more confident that they will not be clobbered by tax rises further down the line. And the very sight of governments putting their financial houses in order reassures people that interest rates will stay low.

This, we were told, prompts a surge in investment and hiring by the private sector, which more than compensates for the negative impact of public-sector consolidation. Such was the doctrine of the “expansionary fiscal contraction”. Our own Chancellor, George Osborne, has given every indication of believing in it, missing no opportunity to preach the paramount importance of reducing deficits.

It was another George – Orwell – who observed that people tend to hold wild political opinions because of the “secret belief… that they will not have to be tested against solid reality”. Why have the proponents of the doctrine of the expansionary fiscal contraction joined the calls for the US to veer away from the fiscal cliff? Because they can see that “solid reality” looming, and they don’t much fancy the chances of their pet theory surviving the clash.

Banks have behaved like imperialists

“Self-determination” first entered the world’s lexicon in the late 19th century as a description of the right of far-flung nations to throw off the imperial yoke.

So in some ways there was something appropriate in the admission of Douglas Flint, the chairman of HSBC, this week that banks like his, thanks to their scandalous behaviour in recent years, have “lost the right to self-determination”.

Global banks have, indeed, seen themselves as plucky colonies since the 2008 crash – defending their autonomy (fighting new regulation) and even sometimes threatening to secede if they don’t get it (by moving to a new, more favourable jurisdiction).

Yet, to most people, it is the banks that resemble the extractive imperial power – ferociously insisting on their taxation (in the form of too-big-to-fail subsidies) and living lives of Roman-style decadence on the proceeds (vast bonuses).

It’s not banks which deserve self-determination, but the poor taxpayer.

Hamish McRae is away

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Senior Planner

£35000 - £38000 per annum: Recruitment Genius: An opportunity has arisen withi...

SThree: Trainee Recruitment Consultant

£13676.46 - £15864.28 per annum + Uncapped Commission: SThree: As a Trainee Re...

Recruitment Genius: Existing Customer Telephone Consultants

£13000 - £18000 per annum: Recruitment Genius: Every day they get another 1000...

Recruitment Genius: Contract Manager

Negotiable: Recruitment Genius: This leading provider of refrigeration, mechan...

Day In a Page

Read Next

Daily catch-up: the endless and beginningless election campaign goes up and down

John Rentoul
Zoe Sugg, aka Zoella, with her boyfriend, fellow vlogger Alfie Deyes  

What the advertising world can learn from Zoella's gang

Danny Rogers
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor