The US fiscal cliff - and the fiscal chasm
The US's economic recovery has been a lot stronger than the UK's.
But that's not saying much. It's not something you can expect President Obama to boast about in Wednesday's first presidential debate.
Growth has not been as strong as Americans are used to, coming out of a tough recession. And, crucially, for the President, the recovery has not produced nearly enough jobs. That is one area where the UK has done much better.
The subject of the debate is domestic policy, so you can expect two issues to dominate: creating jobs, and fixing the federal budget.
As I noted last week, those two challenges come together in the very short-term, because the recovery will ground to a halt if Congress and the White House can't come to a deal to delay some of the tax increases and spending cuts that are due to kick in at the start of the year.
Whether and how that problem gets resolved will depend heavily on the outcome of the election - for both houses of Congress as well as 1600 Pennsylvania Avenue.
But even if the Democrats and the Republicans step back from the so-called "fiscal cliff", there'll still be a fiscal chasm between them when it comes to fixing the budget long term. (And yes, I realise it's difficult for them to step back from a cliff without somehow falling into the chasm, but that's the joy of silly mixed metaphors.)Baseline scenario
Here's the problem.
The latest forecasts from the Congressional Budget office shows the federal government running a budget deficit of more than $1tn in the fiscal year that ended in September. That's the fourth year in a row and the equivalent of 7.3% of output.
The Congressional Budget Office's "baseline scenario" shows that tumbling to 1% of GDP, or less than $200bn, by the time of the next presidential election in 2016.
But, by law, that "baseline scenario", includes all those tax rises and spending cuts next year, which almost no-one expects to be implemented in full.
To get around this, the CBO has also come up with an "alternative fiscal scenario", which assumes that taxes and spending stay broadly as they are. Suffice to say, that second scenario has a lot more red ink. The stock of US federal debt keeps on rising - from around 70% of GDP today to 90% of GDP by 2020.
US fiscal cliff
- Expiring tax-rate reductions and tax credits originally enacted in 2001, 2003 or 2009
- Sharp cuts in Medicare payments to doctors
- Automatic, across-the-board cuts to discretionary and mandatory federal spending included in the 2011 Budget Control Act
- Expiring emergency unemployment benefits and a 2% payroll tax cut for Social Security
Likewise, federal borrowing is still 5% of GDP in 2016, and not on a downward path. It's worth noting that even this forecast depends on reasonable economic growth between now and then.
President Obama's budget plan has little chance of being implemented, even if he gets re-elected. It's Congress that writes the Budget, not the president. But it is the budget he is campaigning on; it shows his fiscal instincts and those of his party.
The CBO thinks the Obama plan would deliver a 3% of GDP deficit by 2016. That 2% of GDP tightening, relative to the 5% forecast if everything stayed the same, would come half from tax rises and half from spending controls. The bulk of those higher revenues, in turn, would come from wealthier Americans. For example, he would let the Bush tax cuts expire for households earning more than $250,000 a year.
The plan proposed by Mitt Romney's running mate, Paul Ryan, promises to cut borrowing further and faster than Mr Obama would. His plan would see federal borrowing of less than 2% of GDP by 2016, but this would be entirely achieved by squeezing spending.
That would have significant implications for key government programmes. Whereas total spending would supposedly be in the region of 22% of GDP in 2016 under President Obama, it would fall to around 20% of GDP, in theory, under a President Romney.Ryan's plan
There's food for critics on both sides to feast on in these competing plans. Mr Obama is said to be too vague about how spending will be squeezed, and to leave borrowing too high, for too long. As Moody's, the ratings agency, point out in their latest report, the Obama plan has both federal spending and tax revenues rising well above their historical averages as the baby boomers start to retire - unlike the Republicans' plan.
On paper, the Ryan plan is a lot more ambitious. But that is why many independent economists have said they don't believe it to be credible.
In order to allow for some rise in health and social security spending over the next few years, the Ryan plan assumes, for example, that federal spending on everything except health, social security and debt interest will fall to just 3.5% of GDP.
As the FT's Martin Wolf has pointed out, that is currently the amount that the US spends on defence alone. The plan also assumes extensive savings will be gained from turning the federal health insurance programme for seniors into a voucher program. On the campaign trail, Mr Romney has been promising to reinvest those savings in the scheme.
So you could say that Mr Obama is promising to defer many of the most difficult budget choices facing America for at least 3-4 years, while Mr Romney promises to address them, but cannot credibly explain how.
Which of them will sound better to the voters, in Wednesday's debate? We shall have to wait to find out. But it's a fair bet that the two sides will be arguing about the US's fiscal future, long after the last vote in the November election has been cast.