The "Fiscal Cliff" would drag America into certain recession

Congress must overcome its partisan rifts.

Irrespective of next week’s election, the fiscal challenges facing the next US government are vast. As the country races towards January’s “fiscal cliff”, the drumbeat warnings of recession have reached fever pitch, with partisan wrangling threatening to derail the sluggish US recovery.

Coming into effect at the dawn of 2013, the “fiscal cliff” represents the confluence of two events: a raft of spending cuts agreed as part of last year’s deal to raise the national debt ceiling and the expiration of Obama-backed extensions of tax breaks introduced in the Bush years.

The fiscal belt-tightening is expected to slash the deficit by almost $500bn – its steepest reduction since 1968. At 5.1 per cent, the rate is comparable to those experienced by Greece, Spain and Italy during their recent austerity drives.

Going over the cliff would almost surely plunge the US into recession, given the fragility of the economy. In May, the Congressional Budget Office warned of a 1.3 per cent contraction if action was not taken.  However, as the cliff looms, gloomier forecasts have predicted annual GDP contractions ranging from 3.6 per cent to 4 per cent.

According to a report issued by the National Association of Manufacturers (NAT), the fiscal shock would result in dramatic job losses of over 5 million by 2014, catapulting the rate of unemployment from the current rate of 7.8 per cent to 11 per cent by 2015.

Naturally, mass job losses and higher federal taxes would have severe effects on consumption. The report predicts that average disposable income is likely to fall annually by 8-10%, hitting the poorest hardest due to cuts in child tax credit and earned income tax credit.

Overall, mass unemployment, plummeting consumption and plaguing uncertainty is likely to weigh heavily on the US economy, stultifying its anaemic recovery unless drastic action is taken.

More pressingly, if Congress fails to raise the debt ceiling before the US hits its $16.4tn statutory debt limit – expected sometime between the election and the end of 2012 – the US would face default – a truly grim prospect. 

The NAT has reported that the approaching “fiscal cliff” has already shaved up to 0.6 per cent from US GDP this year alone, with the tense climate deterring businesses from investing and hiring.

As insecurity gathers momentum, an anti-debt lobby group “Campaign to Fix the Debt” has garnered the support of more than 80 CEOs – including figureheads from General Electric, Microsoft, UPS and JP Morgan – to pressure Congress into overcoming partisan deadlock to hammer out a solution.

But the prospect of this has so far looked bleak; both sides seek different solutions and both sides brook no argument over their staunch positions. One particular impasse stems from the Democrats’ drive to introduce tax cut extensions to all but the highest-earners, much to the chagrin of the Republican contingent. Likewise, Republicans want cuts to health and welfare, whilst Democrats are adverse to cuts in entitlement spending.

Just last summer, such “political brinkmanship” was cited by Standard and Poor’s in their downgrade of the US economy from AAA to AA+, as political wrangling overshadowed debate over the federal debt ceiling.

“We could have a recession in my view that is significantly greater than [anyone] is forecasting today, because it’s an indictment of our ability to govern”, said Dave Cote, leading member of Campaign to Fix the Debt.

Even the current political stalemate is conquered, extended tax cuts and deferred sequestration would hold their own economic perils. This path would only curtail the deficit by $90bn, contrary to the $500bn reduction if America does indeed “go over” the cliff.

Therein lies the trade-off: foster the recovery or confront the debt head-on. Most likely, following pleas from prominent economists such Federal Reserve chairman Ben Bernake, Congress will pursue a medium-term plan that privileges the recovery whilst tackling the debt, but time will only tell.

Overall though, inaction is most certainly not an option. The sudden jolt of the “fiscal cliff” could shock the economy into freefall, dragging the global economy down with it.

As the US stares into the abyss, Congress must – and most probably will – overcome its partisan fissures for the sake of America’s economic future.

Thus is the exigency of the times.

Clouds gather over Capitol Hill. Photo: Getty

Alex Ward is a London-based freelance journalist who has previously worked for the Times & the Press Association. Twitter: @alexward3000

ELLIE FOREMAN-PECK FOR NEW STATESMAN
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Craig Oliver, Cameron's attack dog, finally bites

A new book reveals the spiteful after life of Downing Street's unlikely spin doctor.

It must be hard being a spin doctor: always in the shadows but always on-message. The murky control that the role requires might explain why David Cameron’s former director of communications Craig Oliver has rushed out his political memoirs so soon after his boss left Downing Street. Now that he has been freed from the shackles of power, Oliver has chosen to expose the bitterness that lingers among those on the losing side in the EU referendum.

The book, which is aptly titled Unleashing Demons, made headlines with its revelation that Cameron felt “badly let down” by Theresa May during the campaign, and that some in the Remain camp regarded the then home secretary as an “enemy agent”. It makes for gripping reading – yet seems uncharacteristically provocative in style for a man who eschewed the sweary spin doctor stereotype, instead advising Cameron to “be Zen” while Tory civil war raged during the Brexit campaign.

It may be not only politicians who find the book a tough read. Oliver’s visceral account of his side’s defeat on 24 June includes a description of how he staggered in a daze down Whitehall until he retched “harder than I have done in my life. Nothing comes up. I retch again – so hard, it feels as if I’ll turn inside out.”

It’s easy to see why losing hit Oliver – who was knighted in Cameron’s resignation honours list – so hard. Arguably, this was the first time the 47-year-old father-of-three had ever failed at anything. The son of a former police chief constable, he grew up in Scotland, went to a state school and studied English at St Andrews University. He then became a broadcast journalist, holding senior posts at the BBC, ITV and Channel 4.

When the former News of the World editor Andy Coulson resigned as No 10’s communications director in January 2011 because of unceasing references in the press to his alleged involvement in the phone-hacking scandal, Oliver was not the obvious replacement. But he was seen as a scandal-free BBC pen-pusher who exuded calm authority, and that won him the job. The Cameron administration, tainted by its association with the Murdoch media empire, needed somebody uncontroversial who could blend into the background.

It wasn’t just Oliver’s relative blandness that recommended him. At the BBC, he had made his name revamping the corporation’s flagship News at Ten by identifying the news angles that would resonate with Middle England. The Conservatives then put this skill to very good use during their 2015 election campaign. His broadcast expertise also qualified him to sharpen up the then prime minister’s image.

Oliver’s own sense of style, however, was widely ridiculed when he showed up for his first week at Downing Street looking every inch the metropolitan media male with a trendy man bag and expensive Beats by Dre headphones, iPad in hand.

His apparent lack of political affiliation caused a stir at Westminster. Political hacks were perplexed by his anti-spin attitude. His style was the antithesis of the attack-dog mode popularised by Alastair Campbell and Damian McBride in the New Labour years. As Robert Peston told the Daily Mail: “Despite working closely with Oliver for three years, I had no clue about his politics or that he was interested in politics.” Five years on, critics still cast aspersions and question his commitment to the Conservative cause.

Oliver survived despite early wobbles. The most sinister of these was the allegation that in 2012 he tried to prevent the Daily Telegraph publishing a story about expenses claimed by the then culture secretary, Maria Miller, using her links to the Leveson inquiry as leverage – an accusation that Downing Street denied. Nevertheless, he became indispensable to Cameron, one of a handful of trusted advisers always at the prime minister’s side.

Newspapers grumbled about Oliver’s preference for broadcast and social media over print. “He’s made it clear he [Oliver] doesn’t give a s*** about us, so I don’t really give a s*** about him,” a veteran correspondent from a national newspaper told Politico.

Yet that approach was why he was hired. There was the occasional gaffe, including the clumsy shot of a stern-looking Cameron, apparently on the phone to President Obama discussing Putin’s incursion into Ukraine, which was widely mocked on Twitter. But overall, reducing Downing Street’s dependence on print media worked: Scotland voted against independence in 2014 and the Tories won a majority in the 2015 general election.

Then came Brexit, a blow to the whole Cameroon inner circle. In his rush to set the record straight and defend Cameron’s legacy – as well as his own – Oliver has finally broken free of the toned-down, straight-guy persona he perfected in power. His memoir is spiteful and melodramatic, like something straight from the mouth of Malcolm Tucker in The Thick of It. Perhaps, with this vengeful encore to his mild political career, the unlikely spin doctor has finally fulfilled his potential. 

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories