Last week Congress passed the American Taxpayer Relief Act of 2012, which averted the so-called “fiscal cliff” of immediate spending cuts and tax increases that threatened to send the US economy into a recession. Global markets rose sharply and investors breathed a sigh of relief that Washington demonstrated the political will to get a deal done, even if it came at the eleventh hour. However, we think this is a partial deal at best, and tackles only 10% of the problem—the $1.1 trillion budget deficit—and does nothing to address the government’s $16.4 trillion debt limit which was hit last week. In simplest terms, here are the major components of the Act: 1) income taxes will go up for the top 1% of Americans and remain essentially unchanged for the rest; 2) payroll taxes will increase from 4.2% to 6.2% for everyone; 3) Medicare cuts were avoided; and 4) sequestration or across-the-board spending cuts to the tune of $110 billion (9% of 2011 discretionary funding), have been delayed for another two months, providing Congress with more time to iron out the details. All told, the Act reduces the 2013 budget deficit by about $150 billion, or one-third of the $487 billion decrease projected under the “fiscal cliff” scenario, according to the Congressional Budget Office. That’s progress, but it’s not much of a dent in the $1.1 trillion budget deficit, which now represents about 8% of US Gross Domestic Product, up from 4% just five years ago.
*The information contained in this email was derived from sources believed to be reliable, but completeness and accuracy are not guaranteed. The opinions expressed constitute our judgment as of the date of this email, but are subject to change without notice. Past performance may not be indicative of future results. This information is not intended as an offer or solicitation for any financial instrument. The opinions expressed do not take into account individual client circumstances, objectives, or needs and are not intended to be investment recommendations or strategies.