Tags: Buffett | cliff | deal | 2013

Buffett: Expect Fiscal Cliff Deal, Just Not This Year

Wednesday, 28 Nov 2012 09:31 AM

Lawmakers will strike a deal that will steer the economy away a recessionary fiscal cliff, a one-two punch of tax hikes and spending cuts taking effect at the same time next year, though probably after the event passes in 2013, said legendary investor Warren Buffett.

At the end of this year, the Bush-era tax cuts and other benefits are set to expire at the same time deep spending cuts agreed upon during the 2011 debt-ceiling deal kick in.

The combination, known as a fiscal cliff, could siphon over $600 billion out of the economy next year by some estimates, enough to tip the country into a recession if left unchecked by Congress.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Lawmakers must make tax and spending reforms to avoid the cliff, though such thorny issues take time to negotiate, especially when deciding whether or not to raise taxes and tackle spending.

Jan. 1 may come and go without a deal, but don’t panic.

Lawmakers will negotiate behind closed doors and will avert disaster even if Jan. 1 arrives.

“I’m not sure they’ll do it by Dec. 31, but I have seen Washington, and they don’t want to negotiate in public,” Buffett told CNBC.

“You’re not going to hear Democrats talk a lot about what expenditures they’re willing to cut, you’re not going to hear Republicans talk about what revenues they’ll increase and that’s probably a good thing.”

Public debates put lawmakers in tricky positions where they compromise on tax and spending stances for the good of the country, something some of their constituents might oppose

“But in private, in my view, they’ll get to something. But it may not be by Dec. 31.”

A good compromise would bring government revenue totaling 18.5 percent of the country’s gross domestic product (GDP) and spending equaling 21 percent of GDP.

“We’ve had that plan basically in effect since World War II. I mean, it bounced around a little bit. But those two levels, 18.5 percent and 21 percent are sustainable in the sense that they will not increase the ratio of the national debt to GDP,” Buffett said.

Such a solution won’t tackle deficits in the short term, but will narrow them going forward as the economy grows.

“They’ll run a deficit every year, but because our economy grows, 18.5 percent and 21 percent is a very sustainable figure. In fact, it’ll probably bring down the debt to GDP over time,” Buffett said.

Fiscal Cliff talks continue to drag on in Congress with little advancement.

“There’s been little progress with the Republicans, which is a disappointment to me,” said Senate Majority Leader Harry Reid, D-Nev., according to Bloomberg.

Tax hikes continue to serve as a sticking point between both parties, with Democrats pushing for higher taxes on the wealthy countering Republicans’ calls for extending tax breaks for all but closing loopholes.

“[W]e only have a couple weeks to get something done,” Reid said, Bloomberg added.

“So we have to get away from the happy talk and start talking about specific things.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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