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The world must hope that Obama can pull America back from the brink

THE year 2012 ends with the world waiting to see whether or not America will fall over what is being called "the fiscal cliff".

President Obama has returned early from holiday to halt the slide to disaster. Stock markets are falling and companies across the world are holding their investment decisions. Congress is deadlocked. The so-called cliff is, in reality, the expiry of tax cuts, largely to the wealthiest Americans, that were introduced in the dog days of Republican President George Bush's tenure in the White House. It was his last gesture of solidarity with the super-rich. But it was time-limited.

When they expire at the end of the month, it will lead to a hike in taxes for the wealthy of up to $120,000 a year. Obama says most of these rises have to go through, though he is prepared to exempt all Americans earning less than $400,000 a year. That might appear to be a reasonable enough compromise. But the Republicans in Congress aren't having it. They want the full tax cuts extended and are holding the federal budget to ransom in a bid to force the President's hand. Obama may have only recently won a convincing election victory, but in the US system the White House has only limited powers over spending.

Congress needs to agree to extend measures introduced in 2011, such as help for the long-term unemployed, who are the people most at risk of falling over any cliff. But Republicans warn the country could soon be reaching its "debt ceiling", another unhelpful metaphor that relates to the amount the federal government is allowed to spend in any given year. If this is not relaxed, there will be automatic public spending cuts across the range of federal activities. The result would be similar to what happened in Britain two years ago, when the UK Coalition Government led by David Cameron decided to go over its own voluntary fiscal cliff.

In 2010, Chancellor George Osborne decreed that the UK deficit was to be eliminated in the lifetime of this Parliament, and introduced a range of cuts designed to slash state spending. The hope was that private companies would come along and hire the workers eliminated from the public sector.

Unfortunately, it hasn't worked out too well: Britain has suffered a double-dip recession, and looks like falling into recession again in the new year. The Government has now extended the austerity measures until 2018.

In America, President Obama went the opposite way, relaxing public spending limits, delivering an economic stimulus and launching an array of infrastructure projects. As a result, America has been growing at a rate of about 1.5% to 2% over the past two years. It's not exactly an economic boom, but that is a growth rate Britain would be happy to emulate. However, if there is no compromise – and the US hits the debt ceiling while falling over the fiscal cliff – then the result would be about $500 billion being sucked out of domestic demand after January 1. This would probably put America back in recession, because such a reduction in spending would put the brakes on the economic recovery.

The impact would be felt worldwide. We enter 2013 with the Chinese and Indian economies slowing, and the eurozone back in recession thanks to the EU's own fiscal cliff: the sovereign debt crisis. If America were to plunge into recession, the consequences could be a worldwide downturn. This would be particularly difficult to reverse because the economies of the rest of the world are in no shape to initiate any kind of compensatory fiscal expansion. There is a very real possibility that this could turn into a global economic depression, and this should bear on the minds of the Republican Party Congressmen who seem determined to put tax cuts for a small section of the American super-rich before the wealth of nations.

There is little evidence that the tax cuts introduced by President Bush have actually provided any sustained boost to the US economy. The best way to achieve growth is to protect the incomes of the poorer sections of society ,who spend whatever money they have in the high streets. We need to hope Congress accepts the compromise offered by President Obama and agree to phase out the tax cuts on the highest earners and ease the cap on federal spending.

The alternative is an entirely self-inflicted recession, which will affect the American voters who are unlikely to forgive and forget the actions of the Republicans.

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