A Delicate Balance

November 9, 2012

Achieving growth alongside austerity seems like a balancing act requiring the skills of a master yogi. In some European countries, attempts at fiscal balance via severe austerity have resulted in social and economic fallout. But Perks believes growth and austerity are possible to achieve in tandem, as long as politicians are willing to bend a bit.
-Franklin Templeton Investments

You’d be hard-pressed to find someone who argues that balance is a bad thing, but in this time of austerity versus growth and political us-versus-them, you’d be equally hard-pressed to find agreement on how to achieve balance. Right now the U.S. economy is teetering on the edge of the much-publicized so-called “fiscal cliff,” a one-two punch of automatic spending cuts and tax increases set to go into effect in 2013, and which threaten to tip the nation into recession. Will the country face a “Thelma & Louise” moment, speeding off the cliff and into the abyss? Or will politicians pull together to prevent this economic Weeble from wobbling?

At Cliff’s Edge

Ed Perks, portfolio manager for Franklin Income Fund and Franklin Balanced Fund, has a thing or two to say on the question of balance and potential economic cliff-dives. Says Perks:

“If nothing were to be done, forecasters have projected a potential GDP hit of about 3.5%, and that is very meaningful. Certainly we do have concerns about that, but when we really look at the issues that comprise parts of the fiscal cliff—whether it is the expiration of tax cuts or extension of unemployment benefits—many of these things can be dealt with over a number of years. Thus, the immediate impact on the economy could be much more muted. Ultimately, we do need to see some cooperation in Washington, which I know is hard to envision given the (politicians’) recent track record. Ultimately a government’s ability to live more within its means is very important long term.”

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