What is the Fiscal Cliff and Why should Canada Care?

Well the election is over and the US has a new/same President. While half of the American population might not be happy with the results, its time for Congress to settle down and hammer a few things out, particularly prior to the fiscal cliff.

Lets start with the facts, shall we?

What is the fiscal cliff?

Well, its a sharp rise in taxes and deep cuts in Federal spending, and its set to automatically take place Jan 1st. That gives Congress less than 2 months to sort it out otherwise the US will sink into another depression. It might be somewhat difficult given the 2 year standoff between the President and Congress over government spending and tax cuts.

So basically this the “cliff” was a deadline to force policymakers to make a decision. While President Obama was not responsible for the fiscal cliff,  (we can thank George W. Bush for that), he has had to deal with it since he first took office in 2008. Perhaps the impending election was reason enough to stall, or perhaps there truly are fundamental differences in how the President Obama’s administration and Congress see things. Whatever their reasons were, they have 7 weeks to sort it out or the tax cuts go away and the spending cuts kick in. In reality this will save/earn the government close to $600 billion.

Why is this bad?

As discussed on EVERY SINGLE NEWS OUTLET, the US economy isn’t doing that great yet. Heck, the world economy isn’t doing that great. Take a look a Europe (Greece in particular) if you need examples.  These cuts will not only impede the economic growth, but also have a devastating effect on any country that the US does business with; countries such as Canada.

How will the Canada’s economy be effected?

Canada does a lot of business with the States, in fact Canada is America’s biggest trading partner. Heck, we’re building (pending approval from President Obama) an entire new bridge in the Windsor-Detroit corridor to increase the flow of goods and traffic.  We’re also trying to build the 5.3 billion Keystone  XL pipeline. The pipeline is still pending approval as well, but could create close to 4000 jobs in Canada.

While everyone understands the need for the new bridge, the support behind the Keystone XL pipeline is divided. Some want to have Canada’s energy security taken care of first, before exporting it to other countries.

What is the Global Outlook?

The IMF,  (International Monetary Fund) recently warned of a gloomy global economy as the growth slowed from 3% in 2010, and 1.6% in 2011 down to 1.3% in 2012. The entire report wasn’t just focused on the fiscal cliff though, it also rested some of the blame on the European policymakers and the lack of control over the Euro zone crisis.

Is it really that bad?

Yes and no. The “fiscal cliff” senario is somewhat overblown as not all of the tax raises take place at the same time, but are rather spread out over the year. That doesn’t necessarily mean good news. Economists are predicting a GDP drop between 4 to 6% and that could translate into the unemployment rising another 2% (an additional 2.8 million people of work) for a total of 10%.

Higher US unemployment means people have less money to buy things and as a result less money will be spent importing goods into the US. This will have a direct affect the Canadian economy as we won’t need to produce as much causing people to be put of out work causing the same cycle in Canada.

 

 

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Comments

  1. says

    THANK YOU. I keep hearing those words all the sudden. Fiscal Cliff. And I had no idea what people were talking about! And I also didn’t know that Canada is the USs biggest trading partner. I learned two new things today!

  2. says

    Actually the US Feds have already said “HELL YEAH” to the new Detroit-Windsor crossing. As have our provincial / federal governments (Ontario has already built a full highway leading up to it; the province and feds have promised TONS of cash including an interest-FREE loan to Michigan for their half of the expenses; the loan would be repaid with toll revenues from the new bridge).

    The only holdout has been the state of Michigan where the evil monopolist Matty Moroun (who owns the Ambassador Bridge) has been fighting desperately through every avenue to prevent a new crossing. He’s bribed state legislators, spent $31 MILLION to promote his ballot proposal to kill the bridge with a mandatory referendum (more than anybody has ever spent on a state ballot initiative ever). He’s been suing and interfering, including preventing construction for the new bridge (which got him a couple days of jail time for contempt when he ignored a judge’s order). Thankfully the people of Michigan decided justly on this initiative, even if other votes were less far-sighted (e.g. Prop 2).

    So, yeah, the feds on both sides of the border are good. The province is good. It’s just Michigan that’s been holding out. Some day we’ll have THREE options for crossing and we’ll pay a much lower toll. This is one of the few key roles of government – preventing natural monopolies from ceding political and economic power from the people.

    • says

      Well said Joe. As a resident of Michigan, I wish half of our state were privy to the information you shared here. The advertisements that have been run against the new bridge make it appear that our governor is building the bridge with tax payer money for his own personal gain. I had no idea about the interest free loan to Michigan.

  3. says

    Anyone and everyone is concerned with the fiscal cliff now. The PF blogosphere is flooding with genuine conversation about our country’s debt, I hope someone takes notice. I actually wrote on the same subject today, what do you know :)

  4. says

    I’ve been noticing a lot of bloggers writing about this topic too, but this is the first post I read about it. Sounds like I should keep some investment cash handy for some good opportunities next year. I’m sure tons of investors will start panicking and pulling their money out of the market to somewhere more tax friendly.

  5. says

    Great points on how it might affect Canada. If the worst happens (as the media will of course tell you) then it will certainly have an impace on much of the western world, if not beyond. I don’t know that I buy all the hype, but I do know that it will probably cause some issues in the near term. I would consider myself as tentatively watching to see what happens and doing what I can to be prepared. I’ll also probably be doing some investing like Jeremy will be.

  6. says

    Thanks for laying it out for Canadians in a way that they can see the effects! PS – Canada is footing the entire construction bill for that bridge, or so says the radio.

    I find it interesting that all of the tax cuts were designed to end at once. While it does cause crisis, it actually forces everyone to pay attention to the issue. If there were small tax raises here and there, I don’t think the discussion would be happening. Next up – hopefully they can figure out what to do!

  7. says

    I find it interesting that I’ve seen several Canadian PF bloggers weigh in on Americas election. Several of them, including some commenters, share the opinion that non-American citizens should be allowed to vote in our elections because it affects them. I find this completely absurd! Maybe it’s just because I was born and raised in this super power of a nation, but I could really care less about the politics of any other country, including our friendly neighbor to the north, Canada. And by the way, that Keystone pipeline is going nowhere with Barack Obama, or any other environmentalist nut-job in power.

    • says

      I wouldn’t go so far as to want a vote in the US election; however, what happens in the US has huge implications for the rest of the world. For example, approximately 75 percent of Canada’s trade is with the US and 25% of our GDP is in exports. By contrast, US exports only account for 10% of US GDP and yet are three times larger in dollars than Canada.
      Americans are also starting to pay more and more attention to China, as their politics and economy basically have the US captive.

      • Marissa says

        I feel like our media covers more American news and politics than Canadian and as a result I know more about foreign politics than about Canadian.

    • Marissa says

      Not a fan of the pipeline are we? I tried to stay away from picking a side, but if our PM has his way, it will be there sooner than later.

  8. Chuck says

    Very nice explanation and analysis. Unfortunately, should the US go over a fiscal cliff, it will make the entire world suffer economically. Canada, as a neighbor and major trade partner, will definitely suffer.

    Personally, I believe the US politicians will reluctantly come to a compromise that will avoid economic disaster.

  9. Mike says

    Americans are also commencing to pay more and more attention to China, as their politics and economy basically have the US captive.not a fan of the pipeline are we? I tried to stay away from picking a side, but if our PM has his way, it will be there sooner than later.

  10. Shawn @ PipsToday says

    Fiscal cliff bell is going to ring therefore each and every finance, economic and business blogs, news websites came together with same topic “Fiscal cliff”. I have been read about it at least 15 times withing one week but my excitement is going up with reading each new article about “fiscal cliff”. As count down has been started and just awaiting for some big announcement from Obama administration.

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