Year-end is a stressful and hectic time for most companies. However, at midnight on December 31, 2012, at the dawn of the New Year, employers will face a combination of expiring tax cuts and automatic federal spending reductions – the Fiscal Cliff. The fiscal cliff unrest is the result of the $1.5 trillion deficit in the revenue after implementation of The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). U.S. lawmakers have 3 options to deal with the upcoming crisis: 1) let the current policy, which includes tax increasing and spending cuts, go into effect; 2) cancel some or all of the scheduled tax increases and spending cuts; or 3) find a middle-ground approach.
Investors are concerned about the oncoming fiscal cliff as they expect a resolution and compromise to be difficult to reach due to the currently very partisan nature of the political environment. The current 2013 laws going into effect would have a significant impact on the economy, possibly reducing the national deficit, but reducing GDP, spiraling the economy into a recession.
According to William Gale, an economist at the Brookings Institute and former advisor to George H.Q. Bush, “It will be much easier to negotiate a budget deal going over the cliff…It seems to be the only way we can boost revenues.”
Who will be Impacted?
Almost every taxpayer in the United States will be impacted due to an increase in the marginal tax rates in all income brackets.
Unfortunately, most Americans are unaware of the repercussions of the looming fiscal cliff; with a Pew survey indicating that only 26% of Americans says that they understand the impact of the fiscal cliff very well.
Possible Impact on the Job Market
Since the businesses falling under the highest tax bracket so they would face the maximum impact of the fiscal cliff, we expect to see replication of the effect in hiring and new job creation.
Fall of the business spending in last quarter is showing the business is getting skeptic of the federal government take on Tex cut.
According to recent data, U.S business spending has shrunk to a 1.3% rate, from a growing 19% annual rate last year. In Massachusetts, a state that depends heavily on business spending due to its high concentration of companies that sell B2B goods and services, has an unemployment rate that has risen a half percentage point since July. This is an indicator that companies are increasingly skeptical about the future, and reductions in investments and hiring will continue if a resolution is not reached. According to a Korn/Ferry survey, 39% of respondents cited the fiscal cliff as a factor causing a stop on hiring. Some companies are preparing contingency plans, which include layoffs, in the event that a compromise is not reached, however, this seems to be a last resort option.
Manufacturers, high-tech companies, venture capitalists, and other businesses are taking a wait-and-see approach. The Federal Reserve Bank of San Francisco estimates that uncertainty has added 1 percentage point to the nation’s unemployment rate, which was 7.9 percent in October. Meanwhile, the National Manufacturers Association estimates that the impending fiscal cliff will result in a loss of 6 million jobs and drive unemployment to more than 11% by 2014. The Congressional Budget Office estimates that the unemployment rate in the fourth quarter of 2013 would be at 9.1% due to impact of the fiscal cliff.
However, this heightened employer worry, could mean an increase in the demand for contingent workers, with companies less eager to commit to increasing their employee base in terms of permanent placements.