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What’s New with the Fiscal Cliff? And what does it Mean for Canada?

We might have been waiting anxiously for midnight, but not for the same reasons as Americans did. Of course some of our minds may have been lingering on the fiscal cliff, but more likely they were busy toasting new friends and old, dancing the night away, or well, just dreaming while we were fast asleep. But now that we’ve woken up and shaken off all the New Year’s glitter, where is America when compared with the fiscal cliff? And what does that mean for Canada?

You probably heard that the U.S. had “avoided” the fiscal cliff when you woke up on New Year’s Day; ¬†but that’s not actually true. What they did do was manage to avoid plunging over the side of it and dropping into a full-blown recession effective January 1, 2013. Instead, they get caught on a branch about a quarter of the way down, saving themselves briefly and buying themselves a little more time. So just what exactly transpired for that to happen?

About an hour after the stroke of midnight on New Year’s Eve (or rather, New Year’s Day,) the Republicans were able to come together with the Democrats and come up with a proposal that pleases everybody, for now. While the Democrats got the tax hikes they wanted, they were with broader strokes than they originally wanted. And while the Republicans will get the cuts in spending that they want, they won’t be for at least a couple of months.

The American Taxpayer Relief Act of 2012 Рthe bill that was passed that saved the States from plunging over the cliff, outlined tax hikes and tax cuts that will go into effect, as well as another deadline for ensuring that cuts to spending are also made.

In short (or as short as we can whittle down an agreement between the two opposing parties,) here’s what the bill states:

  • Payroll taxes will rise from 4.2 per cent to 6.2 per cent. That’s going to mean American workers are going to have about $1,200 per person less this year.
  • Those in households earning $400,000 or more will see a permanent tax increase from the current 35 per cent to 39.6 per cent. Those same individuals will also see capital gains rise from 15 per cent to 20 per cent.
  • Taxes on estates over $5 million will rise from 35 per cent to 40 per cent; couples in an estate over $10 million will also see the same tax hikes. However, the Bush tax cuts for individuals earning up to $400,000 will become permanent.
  • Unemployed Americans, if out of work for more than 26 weeks, can continue to receive benefits.
  • Certain Bush-era tax cuts to low-income Americans have been extended.

While much of this is good news, the U.S. still has a long way to go before they can say that they’ve avoided trouble. The spending cuts that the Republicans were pushing for, mainly in the way of ObamaCare, still need to be decided, and President Obama has promised them that they will meet at a later time to see where those cuts can be made. And giving in to doing away with ObamaCare is likely not on the President’s agenda.

The Republicans are also likely to use the spending cuts they want made as a bargaining tool when negotiating the debt ceiling with the Democrats. The federal debt ceiling of $16.4 trillion will be reached come the middle of February; and tougher talks are going to be needed to get that issue resolved.

So what does any of this mean for Canadians?

Pretty much the same thing it means for Americans, without the severity of all the possible disastrous outcomes. If the two U.S. parties can’t come together and make an agreement, tax hikes will still occur in the future, as are spending cuts, most likely. It will be enough to push the U.S. back into a recession and, with 80 per cent of our exports going to the U.S., it could have serious consequences for Canada.

Will it push us into a recession along with them? It’s hard to say. It would largely depend on what continues to happen here at home, with household debt, as well as the interest rate, which is currently expected to rise slightly at the end of the year. While we could very well avoid going into another recession at the same time the U.S. does, we’re certainly not in the great position we were last time. Our mortgage market is still stable, with very few mortgages being in the prime market; but home values are dropping in many areas, and there’s simply not the interest or the affordability that there was five years ago.

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