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Financial industry perspective on economic impacts of fiscal cliff

It’s no surprise that the impending “fiscal cliff"– a combination of automatic spending cuts and expiring tax rates – has taken center stage as the critical policy issue facing Congress and the White House following the November election.  If policymakers are unable to avert the fiscal cliff prior to January 1, 2013, millions of American businesses and citizens will see their taxes increase, pushing the U.S. economy back into recession and eliminating some two million jobs.

Recent indicators show that businesses have cut back on hiring decisions and investment plans for growth due to the economic uncertainty associated with the fiscal cliff.  It almost goes without saying that failure to address the fiscal cliff is likely to have a detrimental effect on job creation and the economic recovery.

Members of the Financial Services Forum expressed their concerns regarding the fiscal cliff recently in a letter to President Obama and Members of Congress.  In the letter, the CEOs urged policymakers to work together and reach a bipartisan agreement to avoid the fiscal cliff, as well as to take concrete steps to restore the long-term fiscal footing of the United States.  Additionally, the CEOs warned that the consequences of inaction, for the stability of financial markets, millions of Americans, and for American businesses, would be very grave.

In addition to the Forum letter, here is what is being said about the implications associated with going over the fiscal cliff:

 

Economic Indicators

  • According to the Congressional Budget Office (CBO), the fiscal contraction associated with going over the cliff will push the U.S. economy back into recession, with the economy contracting by nearly 3 percent next year, eliminating two million jobs, and raising the unemployment rate to more than 9 percent.  CBO Director Doug Elmendorf said economic growth is already being held back by the anticipation of fiscal tightening and that “the sooner that uncertainty is resolved, the stronger the economy would be in the second half of this year.”
  • Moody’s Investor Service warned that if upcoming fiscal negotiations do not “lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term,” Moody’s will downgrade the United States’ AAA debt rating.
  • A recent Fitch Ratings report said the "fiscal cliff" that looms over the United States “could at the very least cut world growth in half in 2013,” and that the “U.S. fiscal cliff represents the single biggest near-term threat to a global economic recovery.”
  • The Tax Policy Center estimates that 90 percent of Americans will face higher taxes if Congress doesn’t act on fiscal cliff.  Taxes would increase by an average of $3,500 per household if policymakers are unable to renew the 2001/2003 tax cuts.  More specifically, a typical middle-income family making $40,000 to $64,000 a year could see its taxes raised by $2,000 while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.
  • A CNNMoney survey of 17 top economists found that 14 of the 17 believe the spending cuts and expiring tax breaks of the fiscal cliff would cause the economy to go into a new recession.  According to the survey, “12 of them believe the fiscal cliff is the most serious risk facing the economy, more serious than the European sovereign debt crisis, business uncertainty about various government regulations or the continued weakness in the job and housing markets.”
  • A report from the National Association of Manufacturers (Fiscal Shock: America’s Economic Crisis ) predicts that the economic damage would deepen considerably if Congress fails to avert the cliff, destroying nearly 6 million jobs through 2014 and sending the unemployment rate up to 12 percent.  The report additionally said “if the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014.”
  • HSBC economists Kevin Logan and Ryan Wang have said “[W]e have become more pessimistic in the run-up to the election about the impact of political gridlock on the ability of politicians to fix the economic problems faced by the US. While our general expectation of a noticeable amount of fiscal drag developing in 2013 (about 1.0 percent of GDP) is still our baseline case, the path to fiscal consolidation in 2013 could be bumpier than we previously thought … leading to a great deal of uncertainty and possible financial market volatility. … There could be echoes of 2011, when a stand-off in Washington about extending the debt ceiling resulted in uncertainty and market volatility. We believe a U.S. credit rating cut is becoming more likely in 2013, regardless of who wins the election.”
  • In a Citi Research Economics report, the authors write that “the [fiscal] cliff measures represent an unprecedented $800 billion (5% of GDP) shock in calendar 2013. We estimate that GDP would decline by 1% with unemployment persisting above 9½% amid weakened financial conditions and the lack of an effective monetary policy buffer. Despite declining deficits, the policy shift would be suboptimal from a wide range of perspectives: Higher tax rates could harm growth incentives, while gutting discretionary spending would undermine needed public investment.”

Executive Level Concern

  • More than 80 CEOs of the U.S.’s top corporations, such as Boeing, Goldman Sachs, and Caterpillar, urged members of Congress to work together and reduce the federal deficit with tax reforms and spending cuts.  “In order to develop a fiscal plan that can succeed both financially and politically, it must be bipartisan and reforms to all areas of the budget should be included,” wrote the CEOs in a letter organized by the Fix The Debt campaign. “It is urgent and essential that we put in place a plan to fix America's debt. An effective plan must stabilize the debt as a share of the economy, and put it on a downward path.”
  • The Business Roundtable‘s third quarter CEO Economic Outlook Survey shows that just 29% of CEOs surveyed expected employment at their companies to grow in the next six months, compared to 34% that expect their headcount to decline.  The CEOs additionally downgraded their forecast for 2012 economic growth to 1.9% from 2.1% in June.
  • Deloitte’s 3rd Quarter Survey: CFO Signals: What North America’s Top Finance Executives Are Thinking – And Doing found that the CFOs’ expectations for year-over-year sales growth, earnings growth, capital growth, and hiring projections were all lower than the previous quarter.  Furthermore, in the U.S. alone 47 percent of the CFOs said that they are less optimistic about their companies’ prospects during this quarter than the last.
  • In an American Public Media Marketplace interview, Goldman Sachs Chairman and CEO Lloyd Blankfein said the failure for Congress to reach an agreement on the fiscal cliff “will lead to less confidence in the U.S. which will have vast implications for a country that again is the strongest economy, whose currency is the reserve currency of the world.”
  • JPMorgan Chase CEO Jamie Dimon spoke of the concerns of the fiscal cliff during an appearance on CNBC, saying “I've spoken to CEOs who say, you know, absolutely, we are making decisions to protect ourselves from the ‘fiscal cliff’ and those are like investment decisions and hiring decisions.  He further stated that “the fiscal cliff and another recession would be terrible for America, we should do everything we can to avert something like that. So it's not about JPMorgan. It's about what's right for the country."
  • Caterpillar CEO Douglas Oberhelman expressed the mounting business anxiety in a recent Wall Street Journal article: "I cannot talk to one of our customers in the U.S. that isn't scared to death—these are dirt guys, these are builders, these are coal miners—about [the economy in] 2013 coming off the tracks because we're already very fragile."
  • On a CNBC Squawk Box appearance, Blackrock CEO Larry Fink said of the fiscal cliff: “CEOs today are pensive about what to do next.  They’re just sitting back, they’re not hiring as much, and they’re probably not spending as much.  There’s a deceleration in the economy, and we’re all starting to feel it.”

Forum Perspective

Forum President and CEO Rob Nichols recently commented on the implications associated with the fiscal cliff in the media:

  • "There's definitely concern on the part of the financial sector over the need to tackle this," said Robert Nichols, president and chief executive of the Financial Services Forum, pointing to both the immediate fiscal cliff and the longer-term national debt situation. "You're introducing tremendous market uncertainty at a time when we already have economic fragility." (American Banker)
  • “It’s hard to predict what [Congress] will do and how they will do it,” says Rob Nichols, president of the Financial Services Forum, an influential lobbying group in Washington. “Our hope is that policy makers will agree to put us on a fiscally sustainable path and ensure that we don’t default on our debt.” (Financial Times)
  • “We're not prescriptive of what the long term deal should be, but one thing we do urge [President Obama and Congress] to do is to work together in a bipartisan way and to have the House and Senate, Republicans and Democrats, Congress and the White House work together to avoid the market instability associated with going over the cliff.” (CNBC Squawk Box)

American families and businesses small and large are facing difficult economic times and failure to address the fiscal cliff responsibly will further impair our recovery.  One would hope that policymakers will take the economic consequences of inaction seriously and work together to reach a bipartisan agreement to avoid the approaching fiscal cliff and address our nation’s long-term fiscal challenges.

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The Financial Services Forum is a non-partisan financial and economic policy organization comprising the CEOs of 18 of the largest and most diversified financial services institutions doing business in the United States.

The purpose of the Forum is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.

Welcome to ForumBlog. This is where our policy team analyzes the latest proposals, ideas, and news surrounding financial sector regulatory reform, trade, and the economy. Our goal is to provide thoughtful insights on the issues impacting the intersection of Wall Street and Washington, as we pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.