“If there”™s any lesson to draw from these past few weeks,” said President Obama, following a flurry of legislative activity in the weeks following the 2010 midterm elections, “it”™s that we are not doomed to endless gridlock.”
Nearly two years later, however, that has not proven true.
Congress is again faced with the likely expiration of the Bush-era tax cuts, this time coupled with hundreds of billions of dollars in defense and discretionary spending cuts scheduled to begin in 2013, with economists warning that legislative inaction could result in another global recession.
With the infamous fiscal cliff now less than three months away, Congressman Jim Himes on Sept. 27 told a group of financial industry representatives that he thinks there is a seven in 10 chance that Congress will reach a “grand bargain” akin to the Simpson-Bowles plan released in late 2010.
Speaking at the Hyatt Regency Greenwich at an event hosted by Deloitte & Touche as part of the firm”™s third annual Hedge Fund Symposium Series, Himes said the combined weight of the “sequestration” defense and discretionary spending cuts plus the expiration of the Bush-era tax cuts will compel Congress to act.
“Make no mistake: none of these cuts were thought through as intelligent cuts,” Himes said. “They were designed to be precisely what they are, which are brutal hammers hanging over the head of Congress.”
Those hammers, Himes said, combined with the expiration of the 2001 and 2003 tax cuts, “make a toxic package that is the one thing that will cause my very polarized House of Representatives and a polarized Congress in general to do the deal that needs to be done.”
Himes said the most likely outcome is for Congress to pass a temporary extension of the tax measures set to expire and a temporary postponement of the sequestration cuts, with a hard deadline sometime in 2013 for a legislative package to be assembled and approved in order to avert a new global economic meltdown.
Jeff Kummer, a director of tax policy at Deloitte”™s Washington, D.C., office, echoed Himes, saying he thought Congress would, at the very least, enact a temporary measure between the elections and the end of the 2012 session.
However, Kummer warned, allowing the tax cuts to expire and the sequestration measures to take effect would have a significant impact on consumer spending “right away.”
“If rates expire, even if just temporarily ”“ even if congressional Republicans, the White House, congressional Democrats all get together and say, sometime in 2013, ”˜We”™re going to fix this and retroactively make everybody whole again”™ ”“ you”™re still going to have people with less purchasing power in their pockets the first biweekly pay period in January,” Kummer said.
In a report released Sept. 27, Fitch Ratings, based in London, said a worst-case scenario of allowing the tax cuts to expire and allowing the defense and spending cuts to take effect would result in 2013 global gross domestic product (GDP) growth of just 1.3 percent, versus Fitch”™s current projection of 2.6 percent global GDP growth.
“The dramatic fiscal tightening implied by the fiscal cliff could tip the U.S. and possibly the global economy into recession,” Fitch wrote. “At the very least it would be likely to halve the rate of global growth in 2013.”
While Himes reinforced his opinion that Congress would act on the challenges ahead, he left the door open for the opposite.
“The reason I give that a 30 percent probability is because it”™s just such an easy thing to do,” he said. “If we give into our worst instincts to make ourselves and everybody else feel good, it will require capital markets to ultimately force us to govern ourselves. I think our leadership is better than that.”
