As I have been arguing all along, a tax increase was bound to happen in 2005. The economic policies during last four years were predicated on using tax cuts to revive the economy so that a boom will bring in more tax revenue. A highly optimistic (and therefore risky) argument it was! Unfortunately, we have now reached a point that the only way to balance the federal budget is either we cut benefits and government programs to a point that Americans will revolt or we raise taxes. It seems that Fed Chairman Alan Greenspan prefers raising taxes.
In a speech yesterday, Greenspan said, "Indeed, under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. But most important, deficits as a percentage of GDP in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse."
While his English is not always easy to decipher, what Chairman Greenspan is saying is that our deficit as a percentage of overall GDP is unsustainable. We are almost at a point that if we do not control the budget and trade deficits, we might be subjecting the economy to a lot of pressure, even leading to stagflation.
This will have huge implications on business. As a business leader, you are probably already experiencing the pressure from rising oil prices and gradual increase in inflation. Oil prices affect each and every sector of the economy and consumers feel the pain almost instantaneously. Interest rate raises in recent months are already affecting consumers who carry credit card debt or home equity lines of credit. In other words, consumers are ready to cut back on their spending. (Related article: How to respond when consumers cut spending?)
The solution to deal with the crisis is to some extent cost cutting but more importantly a business model transformation.
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Impact of 2006 budget on businesses
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In a speech yesterday, Greenspan said, "Indeed, under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. But most important, deficits as a percentage of GDP in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse."
While his English is not always easy to decipher, what Chairman Greenspan is saying is that our deficit as a percentage of overall GDP is unsustainable. We are almost at a point that if we do not control the budget and trade deficits, we might be subjecting the economy to a lot of pressure, even leading to stagflation.
This will have huge implications on business. As a business leader, you are probably already experiencing the pressure from rising oil prices and gradual increase in inflation. Oil prices affect each and every sector of the economy and consumers feel the pain almost instantaneously. Interest rate raises in recent months are already affecting consumers who carry credit card debt or home equity lines of credit. In other words, consumers are ready to cut back on their spending. (Related article: How to respond when consumers cut spending?)
The solution to deal with the crisis is to some extent cost cutting but more importantly a business model transformation.
Recommended articles
Impact of 2006 budget on businesses
Greenspan is not always right