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December 3, 2012updated 05 Jun 2017 11:34am

Fiscal Cliff threatens US millionaires

Congress and the White House are locked in negotiations to strike a deal to weaken the impact of tax increases and spending cuts due to be implemented in January. December 31 is the deadline for action before scheduled fiscal tightening of over $600 billion - about 4% of U.S. GDP - automatically comes into play. An enduring fall off the cliff would hurt the economy, and America's wealthy are not immune.

By Chris Rocks

Congress and the White House are locked in negotiations to strike a deal to weaken the impact of tax increases and spending cuts due to be implemented in January. December 31 is the deadline for action before scheduled fiscal tightening of over $600 billion – about 4% of U.S. GDP – automatically comes into play. An enduring fall off the cliff would hurt the economy, and America’s wealthy are not immune.

As of 2011 there are just over 5.1 million millionaires (high net worth individuals, HNWIs) in the United States, just 165,360 fewer than in 2007 despite the financial crisis (see chart). The volume of US millionaires is forecast to grow by 4.3% in 2013; but that number could instead drop by as much 6% in 2013, and HNWI wealth by about $240 billion, if the so called ‘fiscal cliff’ is not averted.

Number of HNWIs

The issue has deeply divided American politics. There is balance to be struck between setting the country on a sustainable fiscal path and engendering an environment of more robust near-term growth.

While the US housing market has been recovering and global stocks have rallied in the second half of 2012, the IMF expects modest growth of just 2% for the US in 2013. But the Fund has also warned of the potential negative effects of the ‘fiscal cliff’, cautioning that the full brunt of policies contributing to tighter fiscal policy could push the US economy into recession, and possibly the global economy as well.

The Congressional Budget Office, for example, believes real economic growth would contract at an annual rate of 1.3% for the first half of 2013 under the worst case scenario. In this instance we forecast the number of HNWIs would fall by 315,000 in 2013 and HNWI wealth would fall by about $240 billion.

US HNWIs - Fiscal Cliff Scenarios

However, it is generally deemed likely that a deal will be reached soon: either before the year-end, or early in January. Neither party wants to be blamed for triggering an economic downturn. Even if the ‘fiscal cliff’ is avoided though, it doesn’t necessarily mean the US economy will sidestep a slowdown.

The nature of any deal is important. "Kicking-the-can" would likely see markets remain volatile through the start of 2013. There also remains the possibility of a growth-sapping settlement which prompts a damaging degree of fiscal tightening. In our ‘retrenchment’ scenario, a slowdown in annual GDP growth (to 1% in 2013) leads to a decline in the number of US millionaires of 26,000; HNWI wealth would also fall under this scenario, though by only $40 billion.

The Federal Reserve Chairman, Ben Bernanke, has said that a strong plan on reducing long-term federal budget deficits without harming the recovery – a grand fiscal bargain – could lead to a strong bounce in the US economy. In this case, where fiscal uncertainty was removed, we project that the US HNWI population would swell by 443,000 individuals next year and HNWI wealth would increase by more than $1.6 trillion.

However, it is more likely that some fiscal uncertainty will hang over the economy for some time to come as longer-term budgetary challenges persist into 2013. As a result, assets like gold and prime property will be increasingly appealing to wealth managers. WealthInsight analysis shows that fixed income products recorded the strongest growth between 2007 and 2011, driven by a movement to safer asset classes. Looking ahead to 2016, we forecast that alternatives will be the top-performing asset class for HNWIs.

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