The Fiscal Cliff Impasse Could Hit Holiday Spending

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Photo: Kim Bhasin / Business Insider

A failure to reach a deal over the year-end automatic spending cuts and an expiration of tax breaks – known collectively as the fiscal cliff – would hit consumer spending and economic growth in the holiday season, according to the White House.As Congress resumed after the Thanksgiving break and after the busiest shopping weekend of the year in the US, the Obama administration released a prediction that consumer confidence would take a significant hit if a deal was not reached.

Sales figures for the holiday weekend were encouraging: total spending was $59.1bn, 12.8% higher than last year, according to a survey from the National Retail Federation. An estimated 139.4m adults visited US stores and websites from Thanksgiving through Sunday, up 6.4% from last year.

But Monday’s report from the White House National Economic Council, titled ‘The Middle-Class Tax Cuts’ Impact on Consumer Spending and Retailers’, warned consumer confidence, currently at a five-year high, was at risk. “The hard-earned rise in consumer confidence will be at risk if the middle-class tax cuts are not soon extended with a minimum of political drama,” it said.

If Congress fails to act, the report states, every American family’s taxes will automatically go up “including the 98% of Americans who make less than $250,000 a year, and the 97% of small businesses that earn less than $250,000 a year. A typical middle-class family of four would see its taxes rise by $2,200.”

“While the president is committed to working with Congress to reach compromises on areas of disagreement, there is no reason to delay acting where everyone agrees: extending tax cuts for the middle-class. There is no reason to hold the middle-class hostage while we debate tax cuts for the highest income earners,” says the report.

A report from the independent Congressional Budget Office recently warned that failure to reach an agreement over the fiscal cliff would plunge the US back into recession and drive unemployment back up to 9.1% from the current 7.9%.

The White House report does not mention the impact on unemployment or make any predictions about the return to recession, concentrating on the immediate impact on consumers.

“American consumers are the bedrock of our economy, driving more than two-thirds of the overall rise in real GDP over 13 consecutive quarters of economic recovery since the middle of 2009. And as we approach the holiday season, which accounts for close to one-fifth of industry sales, retailers can’t afford the threat of tax increases on middle-class families,” says the report.

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