Wrong move could set the economy plummeting, says IMF chief

Failure to reach an agreement on the terms of the planned fiscal cliff could result to a zero growth of the economy, says International Monetary Fund chief Christine Lagarde. Chief Lagarde says that it falls on Washington the burden of assessing the possible downside risk of not reaching a comprehensive deal on the fiscal cliffs.

Right now, the economy has been showing signs of optimism. The number of jobless claims has gone down, the unemployment rate improved, the overall household debt reduced and the housing sector went up too. But the US economy is still very fragile and one wrong move could get it toppling back down.

According to Chief Lagarde, the fiscal cliff could either improve or worsen the US economy. Since the economy of the US is a very diverse landscape, any comprehensive deal must then address three major concerns: the fiscal cliff, the country debt and the fiscal deficit.

What is the Fiscal Cliff of 2013?

The fiscal cliff is a term used to refer to the scheduled effect of the conditions listed in the Budget Control Act of 2011. Under the said Act, there will be a 2% tax increase for workers by midnight of December 31, 2012. Other inclusions of the Act are as follows:

• Businesses will also see an end of the certain tax breaks that they currently enjoy.
• The alternative minimum tax would be larger.
• The taxes related to the Health Care Law would take effect.
• The tax cuts implemented for the years 2001-2003 would no longer take effect.
• The spending cuts in accordance to the budget ceiling agreed in 2011 would also start to take effect.

But Lagarde says that the rest of the world could also felt ripples of the shockwave of over $600bn tax increases and spending cuts that will wash on Americans by 2013. She explains that the US economy is tightly linked to the rest of the world, especially to that of Europe. And right now, the Eurozone is still showing very slow economic improvements.

“The US Could Be Its Worst Enemy”

Chief Lagarde says that if a comprehensive deal is not reached on all three factors, then it could result to the US getting more exposed to its own difficulties and issues. In fact, the growth of the US economy could go down to 2.1% next year from the 2.2% this year if the deal is unsuccessful. The stock exchange would be affected as well as the interest rate of loans acquired through banks.

At present, President Obama is doing talks with the House of Representatives to hopefully reach a shared sentiment on the percentage of increase of tax rates. This is a crucial step since Chief Lagarde says that the agreed percent of increase must not fuel the doubts of investors, household and entrepreneurs in making decisions that would go against the supposedly bettering economy.

Further, Chief Lagarde says that the best way to approach the looming fiscal cliff is to come up with a solution that would increase revenue by tax collection, creating new sources of revenue and cutting spending costs. It is only by this that that US economy will positively benefit from the Fiscal Cliff.