With just hours left before the US hits the “fiscal cliff”, stocks on the other side of the world wilted as investors sold off riskier assets to lock in profits just in case budget negotiations fail in Washington.
American political leaders face a deadline tonight to reach an agreement before steep tax increases and spending cuts begin to take effect January 1 – this, at a time when the US economy is still struggling to recover from the last recession.
Democrats and Republicans have failed so far to reach a budget deal despite intense negotiations.
Much of the impasse centres on how to address the automatic tax increases that take effect in 2013.
That is when tax cuts first enacted under President George W. Bush, and extended under President Barack Obama, are scheduled to expire.
That would drive taxes up for nearly all Americans and deplete the already fragile economy of 600 billion US dollars.
And budget cuts of 8% or 9% would hit most of the federal government, touching all sorts of things from the military to weather forecasting.
Some economists predict the tax-and-spending effects of the fiscal cliff could eventually throw the economy into recession.
If the deadline passes, politicians still have a few weeks to keep the tax hikes and spending cuts at bay by repealing them retroactively once a deal is reached.
The uncertainty drove down stock markets on the last trading day of the year. Australia’s S&P/ASX 200 fell 0.5% to 4,648.90. Hong Kong’s Hang Seng, trading for a half-day, was flat at 22,668.48.
Benchmarks in New Zealand, Singapore and India also declined. Mainland Chinese stocks rose.
Markets in Japan and South Korea were closed for the New Year’s holidays.