The last time, political deadlock in the US delayed an increase in the country’s debt ceiling and threw doubt on the stability of its economic and fiscal policies, its investment rating was downgraded. If this happens again, the consequences are likely to be even more dire.
However, despite this, the US is heading towards a fiscal cliff: Mandatory budget cuts and tax hikes from January that will reduce government and private spending, slow economic growth and even push the country back into recession.
To avoid this, Democrats and Republicans must agree to reduce budget deficit and national debt. However, talks have been deadlocked as the Democrats want to protect social security programmes, while Republicans are resisting tax hikes for high income earners.
Despite Barack Obama winning re-election, the Republicans remain in control of the House of Representatives from where they have been able to resist Democrat initiatives. Markets and rating agencies are worried about the stand-off. Rating agencies have warned if there is no deal to reduce US debt, they will most likely downgrade its investment grade.
Business leaders have warned of reduced investment and hiring, while US stocks dropped after the election, in part because of fears over political uncertainty. US business leaders and voters have made it clear that they want both sides to make concessions — the politicians must listen to them.