The U.S. presidential candidates have successfully avoided the thorny issues conjured by the “fiscal cliff” facing Congress and the White House. However, U.S. Senators Saxby Chambliss (R-Ga.) and Mark Warner (D-Va.) took on the issue at a panel discussion during SIFMA’s annual meeting this week in New York. The takeaway: an agreement is possible and Washington might avert disaster.
To say the least, financial services firms large and small are well aware of the economic impacts of the automatic tax increases and spending cuts that are part of the agreement that Congress and the White House hammered out to get to the Budget Control Act of 2011.
A consensus has emerged that the automatic impacts of this law would lead to a deep recession and a downgrade for the credit rating of the U.S. government.
Warner, who believes that sequestration will be avoided, said that dealing with the fiscal cliff will be a time to review how the federal government—the Republicans and the Democrats—got into this mess.
Difficult choices lie ahead such as the fate of very popular tax deductions on capital gains, dividends, mortgages and so on, he said. But even if all of the popular deductions are eliminated, it will trim “barely $4 trillion,” which is well below what needs to be done over the coming years.
Chambliss added that the sequestration process will at least compel the federal government to deal with the consequences of its enormous debt issues.
But the senators reminded SIFMA members that Washington cannot do it alone.
Turning to the SIFMA audience, Warner said, “We’re going to need you” in an effort to reach a bipartisan compromise. “I think we’ll get this done.”
Chambliss echoed that appeal and noted that the business community, including capital markets, stood on the sidelines as the Budget Control Act was being written. “The financial community has been in the crosshairs [of Washington]. …But you are well respected. It’s the capital markets that make the system run.”
While no one has a clear way forward, Chambliss said that President Barack Obama’s declaration during the third presidential debate this week that sequestration would be avoided “was news to us.” However, he added that it could be seen as a sign that the Obama administration might be more willing to negotiate to avoid disaster.
Even so, Chambliss predicted that “a tough, political slugfest” will be underway from around Thanksgiving through to the end of the year.
Warner agreed and added that there will likely be one major debate to deal with the matter of the debt ceiling and the tax-and-spending issues that would push the U.S. over the fiscal cliff. Chambliss said it’s likely the process for avoiding the fiscal cliff would be dealt with first.
The one thing that Congress and the White House cannot do is put off the issue for another year. “A complete punt would be awful,” said Warner, who added it would result in an almost immediate downgrade of the U.S. by credit-rating agencies.
While it’s encouraging to hear that some kind of agreement is possible, a lot can happen between now and Dec. 31, 2012 that could derail any hope of a bipartisan agreement.
But, would even a dysfunctional Washington do the unthinkable and let the nation fly off the fiscal cliff into certain disaster?
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