Dear Editor,
As the public waits nervously for the government to strike a deal with the International Monetary Fund at the end of this year, a slowdown in economic recovery is likely to take place. This is in reference to the US fiscal cliff that is expected to take effect on January 1.
This phenomenon stemmed from 2001 when former US President George W Bush was advocating a US$1.7b tax cut to lift the economy out of a recession. However, that effort was thwarted as the Bush Administration failed to secure the majority in Congress that pushed the tax cuts to expire in 2011.
An agreement was made between the Republican-controlled Congress and President Barack Obama when he took office to extend the tax cuts for two more years. As the deadline quickly approaches, both parties have a lot to lose when it comes to the fiscal cliff.
The Republicans would not like to see cuts in defence spending and higher tax rates, while the Democrats regard reduction in benefits to the unemployed and low-income earners as anathema. Unless Congress comes up with an agreement to abate the implications of the fiscal cliff, we could see the US economy diving off a cliff and into a recession.
That would lead to a possible loss of 3.4 million jobs as projected by the non-partisan Congressional Budget Office. A slowdown in the US economy has an association of a similar effect on Jamaica and the global economy at large.
With the passage of Hurricane Sandy increasing the US unemployment rate to a 18-month high, along with the inevitable increase in taxes, this is not a favourable omen for remittances and tourism - our two main foreign exchange earners. As the Christmas season approaches, 'tis the season for the economy not to be jolly.
The inflows of remittances may see a decline due to the effects of Hurricane Sandy. Several states along the east coast that were affected by Hurricane Sandy host large communities of the Jamaican diaspora and the wider Caribbean. It will take time for these senders of remittances to stand on their feet again.
The disturbance in inflows is not only from remittances, but also from disposable income of US consumers. According to the US Tax Policy Centre, the average increase in taxes for middle-income households is US$2,000 a year. With the reduction in consumers' disposable income, the revenues from tourist arrivals will decline this Christmas, which will add more pressure on our Net International Reserves.
This is of utmost concern since Jamaica has aligned itself to be vulnerable to such external shocks by tying its hip to the US economy. This effect may be ameliorated if a deal is struck with the IMF. With the EU in a recession and now the US dangling its feet on the edge of another recession, Jamaica's two main trading partners could contract the economy further into abyss.
The fiscal cliff and the IMF agreement will have an impact on our economic growth, with optimism that the latter would spur growth. History with the IMF, however, may not be favourable to us, but our best bet is indeed the IMF agreement, although there are a number uncertainties that loom in the air.
Alex Williams
alexanthonywilliams@gmail.com
The US fiscal cliff and Jamaica
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As the public waits nervously for the government to strike a deal with the International Monetary Fund at the end of this year, a slowdown in economic recovery is likely to take place. This is in reference to the US fiscal cliff that is expected to take effect on January 1.
This phenomenon stemmed from 2001 when former US President George W Bush was advocating a US$1.7b tax cut to lift the economy out of a recession. However, that effort was thwarted as the Bush Administration failed to secure the majority in Congress that pushed the tax cuts to expire in 2011.
An agreement was made between the Republican-controlled Congress and President Barack Obama when he took office to extend the tax cuts for two more years. As the deadline quickly approaches, both parties have a lot to lose when it comes to the fiscal cliff.
The Republicans would not like to see cuts in defence spending and higher tax rates, while the Democrats regard reduction in benefits to the unemployed and low-income earners as anathema. Unless Congress comes up with an agreement to abate the implications of the fiscal cliff, we could see the US economy diving off a cliff and into a recession.
That would lead to a possible loss of 3.4 million jobs as projected by the non-partisan Congressional Budget Office. A slowdown in the US economy has an association of a similar effect on Jamaica and the global economy at large.
With the passage of Hurricane Sandy increasing the US unemployment rate to a 18-month high, along with the inevitable increase in taxes, this is not a favourable omen for remittances and tourism - our two main foreign exchange earners. As the Christmas season approaches, 'tis the season for the economy not to be jolly.
The inflows of remittances may see a decline due to the effects of Hurricane Sandy. Several states along the east coast that were affected by Hurricane Sandy host large communities of the Jamaican diaspora and the wider Caribbean. It will take time for these senders of remittances to stand on their feet again.
The disturbance in inflows is not only from remittances, but also from disposable income of US consumers. According to the US Tax Policy Centre, the average increase in taxes for middle-income households is US$2,000 a year. With the reduction in consumers' disposable income, the revenues from tourist arrivals will decline this Christmas, which will add more pressure on our Net International Reserves.
This is of utmost concern since Jamaica has aligned itself to be vulnerable to such external shocks by tying its hip to the US economy. This effect may be ameliorated if a deal is struck with the IMF. With the EU in a recession and now the US dangling its feet on the edge of another recession, Jamaica's two main trading partners could contract the economy further into abyss.
The fiscal cliff and the IMF agreement will have an impact on our economic growth, with optimism that the latter would spur growth. History with the IMF, however, may not be favourable to us, but our best bet is indeed the IMF agreement, although there are a number uncertainties that loom in the air.
Alex Williams
alexanthonywilliams@gmail.com
The US fiscal cliff and Jamaica
-->