Strategy & Operations » Governance » Next US president faces a fiscal cliffhanger

AS THE US presidential campaign enters the home straight, the omens point in both directions. The incumbent starts with a huge advantage. Since 1980, only two presidents – Jimmy Carter and George Bush senior – have been denied second terms by the electorate. But, as president Obama is learning, it is much easier to attack than it is to defend. In 2008, he scored heavily over his Republican opponent with searing attacks on the Bush administration’s handling of the economy. The banking system was on the verge of collapse and the economy had plunged into recession.

Now, four years on, he has to defend his record and, as the first debate with Mitt Romney showed, it is not as easy. Although the US economy has come out of recession, growth – at less than 2% a year – has been disappointing, and activity seems to have stalled, rather than accelerated. There are, nevertheless, some big advantages for the president, such as the reform of financial services, the growth of US exports, the fact that the housing market looks to have bottomed out, and a reasonably bullish equity market.

However, given the huge monetary boost from the Federal Reserve and fiscal stimulus from the government, the return has been modest. In particular, the sub-trend growth means the labour market has been in the doldrums, despite September’s good figure. While there has been substantial growth in employment, the jobless rate remains too high.

There is another major issue facing the winning candidate. As in most European countries, the budget deficit and national debt are rising at rates that are making markets nervous and dividing the political parties. In the US, measures are in place to reduce the ballooning deficit. George Bush’s tax cuts will unwind next year, just as some previously agreed spending cuts come into force. The effect of this fiscal tightening is estimated at about 4%-5% of GDP which, for an economy growing at an annual rate of 2% or less, will act as a major brake. The timing is awful.

This ‘fiscal cliff’ provided the context for a debate on fiscal policy between the two candidates. And the dilemma faced by the next president is not dissimilar to that facing George Osborne. Who pays and by how much is one of the areas of difference: the Democrats claim the rich will benefit from Republican tax breaks, while Romney claims he has the interests of the middle classes at heart. But easing the fiscal stance will make the deficit worse. There are also differences on job creation, with deregulation and free markets the favoured route of the Republicans, while shrinking the role of the state (and health spending) at the same time. There would also be a boost for defence spending from Romney. And there is a hint of protectionism in the campaigning, with both candidates appearing to take a more assertive stance against China.

Whatever the outcome, it is likely that choices will be limited. Any real room for presidential manoeuvre will be constrained by the huge deficit, the need to win the middle ground in the election to gain the White House, and the fact that the two houses of Congress are controlled by different parties. There may in fact be more scope for radical action at state than at federal level. Obama’s record is not a bad one, bearing in mind that it takes much longer to recover from financial downturns than the usual boom-bust cycles. His problem is that he has disappointed the hopes he raised four years ago. His opponent’s problem is that nobody is sure they have seen the real Mitt Romney. What is certain, however, is that- in the closing weeks of the campaign – James Carville’s statement in Bill Clinton’s campaign in 1992 will hold good: “It’s the economy, stupid.” ?