The U.S. Fiscal Cliff’s Effect on Mining

  • Written by 
  • Wednesday, 16 January 2013 09:59
(1 Vote)

Talk of the ‘U.S. fiscal cliff’ has been dominating media across the globe these past few weeks but many of us are wondering what it really means and if it will have any effect on Australia and our lucrative mining industry.

Under the Budget Control Act of 2011, new terms were scheduled to go into effect at the end of 2012 creating quite a nightmare for the U.S. government already dealing with a volatile economy.

President Obama signed the ‘fiscal cliff’ bill into law just days into 2013 in an attempt to avert the fiscal cliff which would likely have sent the US into an irrefutable recession.

The House of Representatives passed the deal which will delay automatic spending cuts of $109 billion by two months and raise the rate at which the country’s wealthiest citizens are taxed. Income taxes were raised on households earning $450,000 per year.

Considering lawmakers had 507 days to address the problem which was agreed upon just hours before the final deadline, the bi-partisan truce is largely seen as a good outcome worldwide. However, Democratic congressman Jim Moran says the deal will simply set up three more fiscal cliffs for the future as decisions about health and defense spending cuts have merely been postponed by two months.

The resolution, leading to a removal of the fiscal cliff is positive for the global economy with shares, commodities and the Australian dollar all responding positively.

Australia will likely experience a decrease in growth to around two percent early in the year due to less mining investment but will likely increase during the second half of the year thanks to global growth and the lagged effect of lower interest rates.

Paddy Manning of the Sydney Morning Herald says Wayne Swan has warned Australians that we are not immune if the U.S. slips back into a recession. If the U.S. does at some point fall of the symbolic cliff, our jobs, terms of trade, and economic growth could go with it. The result would be slower worldwide economic growth and less demand for our key export commodities like coal and iron ore.

Though it seems we’re safe for the moment, some say that falling off the cliff would be positive for the future. An almost certain recession if the fiscal cliff does come into effect would be a harsh step in tackling a deficit problem that has gone on far too long.

Would it be worth the short-term pain for the U.S. and ultimately, the world? The Congressional Budget Office predicts that by 2022 the country’s deficit would fall from its current level of $1.1 trillion to $200 billion. We can all agree that would be an excellent outcome but to see it through we would face a period of financial turmoil.

The mining industry would slow and thousands of jobs would be lost. They say you have to suffer short-term pain for long-term gain. Australia’s future lies somewhat in the hands of the U.S. and we will no doubt be anxiously waiting to see if the cliff can be avoided once and for all for the safety of our mining industry.

References Manning, P.

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Is the mining boom in Australia over?

Is the mining boom in Australia over?

No, it's just media hype.
Yes as a result of lower demand.
Still plenty of resources.
There will be a second boom.
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