From N.C. Treasurer Janet Cowell:
If Washington drives over the fiscal cliff, North Carolinas fragile economic recovery will be part of the wreckage.
Absent federal action in the next few weeks, the United States faces over $2.7 trillion in tax hikes and over $1 trillion in defense and domestic spending cuts at year-end what Federal Reserve Chairman Ben Bernanke has aptly labeled the fiscal cliff.
We have heard that the fiscal cliff is really a slope, that tax increases and spending cuts could be administratively delayed or retroactively reversed, that kicking the can into 2013 makes sense to intensify the pressure for a deal. That thought process is reckless and naïve.
As state treasurer, I am concerned about potential impacts on our pension fund, our bond rating and the state budget.
With time running out before year-end, investors get nervous, causing market volatility and accompanying unpredictable pension returns. If returns are low, North Carolinas taxpayers will need to make up the difference.
Punting on the fiscal cliff would send rating agencies the wrong message that our federal government is truly dysfunctional. As Alan Krueger, Chairman of the Council of Economic Advisors, put it, the message would be that government cannot solve the problems it is there to solve. If the federal rating is downgraded another notch, North Carolinas AAA bond rating will be automatically knocked down a rung, making it harder to fund roads, schools and other capital improvements.
In a worst case situation where Congress does nothing, experts suggest Americas GDP would be cut by 4 percent, sending our economy back into a recession and putting 2 million individuals out of work. Here in North Carolina, if no deal is reached, an estimated 100,000 people could lose unemployment benefits and the typical middle-class family earning an income of $63,700 could see their income taxes rise by $2,200, according to a White House report. Going over the cliff also means a 6.3 percent cut in state revenue from the loss of federal money. North Carolinas military bases and research universities will feel the impact in particular.
In addressing the fiscal cliff, policymakers should follow two core principles:
First, there must be an immediate down payment to prevent us from going over the cliff. This should be a balanced approach that applies revenue reform and spending cuts. Experts recommend closing tax loopholes and reducing deductions but economists agree that this will be insufficient. Both political parties must be willing to compromise on key items, including higher marginal tax rates for the wealthy and reform of Medicare and Social Security.
Second, the deal must include the framework for long-term debt reduction. Federal debt now stands at 70 percent of GDP, the highest level since 1950. Over 10 years, federal deficits must be reduced by $4 trillion if the debt to GDP ratio is to be stabilized or reduced. If it isnt, fiscal crises will become more frequent and policymakers ability to respond will become severely limited.
So far, world markets have not reacted strongly to Washingtons lack of urgency. But the markets will take notice the closer we get to Dec. 31 with no solution. The question is whether to go over the cliff and deal with our issues only after being compelled by a financial crisis or preemptively address the problem by putting on the brakes now and walking away from the cliff.
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