In the next 24 hours, the world will know if American President Barack Obama has been granted another four years in the White House, or if Republican contender Mitt Romney will be given a chance to try to lift the United States out of its crippling recession.
And the outcome matters to Australian SMEs more than you may realise.
While our government argues we’re insulated from global economic turmoil, low consumer confidence worldwide is really one of the few things holding us back.
As plenty of economists have pointed out, local shoppers aren’t spending money because they’re watching. They’re watching for Europe and the United States to recover.
A consumer confidence recovery in the United States matters. Once Americans start spending, creating jobs and growing their gross domestic product, then local consumers and business alike will be much happier.
What’s good for the United States economy is good for our economy. It’s all connected.
To that end, we should definitely care about which presidential candidate would make, or at least assist, that plan happening faster. But which would do such a thing?
The polls are tight. While individual state polls show Obama has an edge in the key swing states, Romney has a slight edge in the national surveys. For some good election coverage, you can do no better than the New York Times’ blog FiveThirtyEight, which puts Obama ahead to win.
So which presidential candidate will be the best choice for Australian SMEs?
A short-term recovery
The American economy is getting better, but it’s certainly not anywhere near good yet. Unemployment remains at 7.8%, and although consumer confidence is improving, it’s still not indicating people think the economy is healthy.
What it needs is a short-term burst. What presidential candidate is best equipped to do that?
This question is really about perception, because a president won’t be able to undertake a lot of meaningful action in the short term. Even making changes within a year will be a tough ask.
As for an impact on the stock market, evidence suggests Democratic presidents preside over better returns than their Republican counterparts, although those returns don’t start flowing through until the second or third year of a four-year term.
A short-term impact depends on getting things passed. With polls suggesting a Republican-controlled House and a Democratic Senate, neither Romney nor Obama will be able to get many measures passed quickly.
Confidence will be influenced by perception. For better or worse, businesses generally believe Republican presidencies are better for the economy.
In the short term, it’ll most likely be Romney who provides some immediate relief. Not because of legislative action, but due to the perception among businesses that a Republican presidency is positive for the economy – it’ll be a self-fulfilling prophecy.
Dealing with the “fiscal cliff”
This is probably the biggest issue of the election so far. The United States is running a $US1.1 trillion deficit, with shortfalls now running over $US1 trillion for four years straight.
Public debt is even worse. At $US11.3 trillion, it’s sitting at 73% of GDP. Total national debt has reached $US16 trillion.
The “fiscal cliff” refers to the point where that debt becomes unsustainable and the country defaults on its payments. That point must never be reached.
Each candidate has a different plan. Obama’s is to make debt stop growing faster than GDP. The budget for 2013 that he’s proposed would work on reducing the size of the deficit to less than 3% of the economy after a few years.
While the plan doesn’t include a lot of spending cuts, it means stabilising the debt at 76% of GDP from 2020-2022, according to the Congressional Budget Office.
To do this, Obama promises to incorporate spending caps as part of last year’s Budget Control Act. Discretionary spending would fall, and overall spending would average 22.5% over the next 10 years – down from its current point.
It’s a modest proposal. Some say too modest.
Romney, on the other hand, wants big cuts. He has promised to cap government spending at 20% of GDP and balance the budget by 2020.
Except that he’s ruled out raising any revenue. In fact, he wants the corporate tax rate cut to 25%. And some estimates say he wants to increase defence spending by up to $US2 trillion over a decade.
He also wants to cut income tax rates to 20% and investment income tax for people making under $200,000.
To raise money, he wants to get rid of some tax breaks. But he has notoriously refused to specify which of those tax loopholes he wants covered. That’s led to institutions like the Tax Policy Centre suggesting Romney would only raise about $US2.5 trillion over 10 years – not nearly enough to plug the $US5 trillion hole created by Romney’s tax cuts.
Romney makes a lot of broad claims about paying down the debt, but he is giving away very little on the detail. You may not like much of Obama’s plan, but at least he has one. Getting national finances back on track is of critical importance to the world economy, and Obama’s plan stabilises the debt and deficit.
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