FISCAL CLIFFS (2)

Both the American and Danish fiscal cliffs were due to arrive on 1 January. So what happened?

In the U.S., disaster has been averted. The deal cobbled together just after the New Year between Congress and the White House raises taxes on the top 1% of earners, while delaying for two months the automatic spending cuts that would otherwise have kicked in on the first day of the year. As such, it was a political victory for President Obama. Republicans have not voted for higher taxes in more than two decades, and had vowed not to do so this time around. But in the war of words and political blame, it is they who blinked.

Nevertheless, that does not mean that the fiscal cliff has been averted. In most countries, legislatures approve tax and spending measures; any resulting surplus or deficit is then left to itself as a residual. However, America has an unusual system, whereby Congress not only approves tax and spending measures, but also votes on the results by approving increases (since the budget is nearly always in deficit) in the federal debt ceiling. You would think that if legislators have taken decisions, then they would gladly accept the consequences of those decisions. But hey, this is Congress.

Which is why the two months delay is important. Around that time, the Treasury will bump up against the current federal debt ceiling, and will have to ask Congress to increase it. At which point all the Republicans who were dead against the latest deal will have the opportunity to reopen it, and be intransigent again. In other words, the latest deal merely buys time, it doesn't really solve anything.

In my earlier post, I said that Danish politicians, in contrast to their feckless equivalents across the Atlantic, were far too sensible not to tackle the fiscal cliff caused by people losing their right to unemployment benefit from 1 January. Unfortunately I was far too sanguine. The Government's big idea was the so-called "acute job plan", whereby 12,500 jobs would be created by the public and private sectors by 1 July 2013; priority for these jobs would then be given to people who would otherwise fall out of the unemployment benefit regime during the first half of this year. But the plan has not worked. First, only half of the jobs have been advertised; and in the private sector, it is only 1,500 out of their proposed 7,500 share. Secondly, many of the public sector jobs advertised are completely inappropriate for the long-term unemployed. Saying that a consultant surgeon job is an "acute job" is almost idiotic; no consultant surgeon is currently unemployed, and nobody currently unemployed could do a consultant surgeon's job.Thirdly, although acute jobs are supposed to go to people about to lose their right to unemployment benefit (i.e. the long-term unemployed) no rational employer, not even a public sector one, will take such a person if another candidate is better qualified.

Underlying everything is a serious dose of overoptimism. When it was decided to reduce the dole period from 4 years to 2, starting from 1 July 2010, the Employment Ministry estimated that some 2,000 - 4,000 people a year would fall out of the net. Last year, when the 1 July 2012 deadline was extended by 6 months to 1 January 2013, that estimate had risen to 7,000 - 12,000. Now, however, the estimate has risen again; between 17,000 and 23,000 are expected to drop out of the system during the coming six months.

The truth of the matter is that the Government is floundering on this issue. What seemed a sensible idea when unemployment was modest and falling now seems a disaster when it is high and still rising. Meanwhile, the drip drip of horror stories about families who fall out of the system has started to appear in the press. As in America, the fiscal cliff has not gone away.          

Walter Blotscher