Financial markets around the globe reacted jubilantly after a fiscal cliff deal was overwhelmingly approved by the US Congress with votes of 89:8 in the Senate and 257:167 in the House of Representatives. Although the US economy has been prevented from facing that impasse, more needs to be done on fiscal issues that should be resolved soon.
The American Taxpayer Relief Act prompts us to maintain our US 2013 economic projection at 1.9 percent growth (or within 1.4-2.4 percent). KResearch believes that with this successful resolution that was sealed after the 2012 yearend deadline, the US economy has survived the impending fiscal cliff threat given that the new law is retroactive to January 1.
Salient points of the bill involve tax issues. An agreement was reached on a permanent income threshold for President Bush-era tax cuts announced in 2001. It stipulates that the upper limit on no tax increases be at USD400,000 for individuals and USD450,000 for families. Meanwhile, individuals/families with incomes higher than that will be subject to an increase in their income tax rate to 39.6 percent, from 35.0 percent previously. The bill also includes an increase in capital gains and dividend tax rates, rising to 20 percent, from 15 percent before, for those higher rate taxpayers. An extension on unemployment insurance benefits and tax deductions for children and education was approved.
However, the bill is still not a definitive resolution for all US fiscal constraints. Coming due within the next two months will be:
Details on the agreed automatic budget reductions of USD1.2 trillion over the next 10 years; this bill delayed automatic budget cuts by only two months.
Raising the public debt ceiling of USD16.4 trillion, which the US may have already hit. The US Treasury may adopt some measures to satisfy related issues on some funding to prevent the US from going into a debt default, which otherwise could affect US sovereign credit ratings. Such a Treasury initiative might be adopted for only two months for debt management. This means that a change in the debt ceiling remains an imminent challenge.
The American Taxpayer Relief Act is still not a complete solution, but it bodes well for US fiscal matters, especially negotiations toward automatic spending cuts and a public debt ceiling increase ahead. The US economic shock in 2013 which becomes significantly less likely would be positive for the Thai economy both directly and indirectly. A direct impact may be felt through our exports, which KResearch forecasts may grow 12.5 percent. Indirectly, more stable US Dollar may ease forex volatility for Thai manufacturers.