US may see a stunted economic growth in 2013

A guest post by Andy Masaki
 
There is an air of uncertainty with regards to the possible outcome of the fiscal cliff talks currently being held in the parliament. However, fiscal cliff has ceased to be the most dreadful threat to the US economy in the days to come. This is because the country’s debt ceiling has surpassed in importance as the biggest threat of them all.

According to the economists, the nation’s lawmakers need to address some of the more serious long-term economic woes before they can hope to see any positive results out of their temporary laws to prevent the economy from slipping off in to another recession. Due to this fact, the country is expected to hit another debt ceiling by the month of February 2013. 

In this case, Mr. Richard Kovacevich, ex-CEO of Wells Fargo has opined that any number of deals will not negate the uncertainty clouding the US economy. According to him, debt limit must be a part of the fiscal cliff deal, or else it will become the next prime topic of discussion.

As of now, a cap of $16.4 trillion has been set that was approved by the Congress in 2011.

Moreover, predictions made by the Bipartisan Policy Center say that the government will be in a deadlock and a heated debate will ensue following the economy hitting the debt ceiling. As a result of the previous debt ceiling battle in 2011 credit rating of US suffered a big blow. 

Moreover, stocks crashed and the Congress had to pass a no-confidence vote because of it.

On the other hand, the US economy may not register a double digit economic growth in 2013. This is because a poll conducted by Reuters involving some economists revealed that there will be around 2% growth in the US economy. Following a consensus in the Congress, the government will tighten its fiscal policies. It also is going to reduce the amount of tax concessions provided to the high earning individuals. Apart from that, the defense budget will also be slashed in 2013.

Speaking of capital gains, the marginal tax rate is forcing investors to pay an exorbitant sum of about 15% on their long-term profits. However, rate of capital gains tax may increase by 20% in the New Year. On top of that, high income investors will have to pay another 3.8% more on the Affordable Care Act, besides the 1.2% limitations on the itemized deductions. Out of the fear of increased taxation on capital gains, high net worth individuals as well as investors are scurrying to sell off their investments before 31^st December, 2012.

If the temporary financial regulations are not executed with immediate the economy may suffer a huge loss of around $600 billion in terms of tax hikes and spending cuts. As of now, the US economy has been rated with ‘AAA’ that is considered as the gold standard with respect to the credit rating by few credit agencies. However, due to the political brinkmanship affecting the decision on debt ceiling in the Congress, Standard and Poor dropped its US credit rating by one point and made that to AA+ in 2011.

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Author's Bio – Andy Masaki is a financial writer associated with the Oak View Law Group. His articles regularly appear on some of the most prominent financial websites. He loves to write on personal finance topics as well as on current economic issues relevant to the US economy.