What is the Fiscal Cliff?
As the presidential debates evidenced last night, the economy is a major concern for many Americans. In fact, several people have been mentioning the “fiscal cliff” when calling in and talking with our customer service team.
So, what is the fiscal cliff?
The “fiscal cliff” is a term that refers to the problem that the government will face at the end of the year when the terms of the Budget Control Act of 2011 are scheduled to take effect. They include items of tax increases, drastic spending cuts, debt limits, and unemployment benefit expirations.
President George W. Bush’s signed tax cuts into effect during 2001 and 2003. In 2010, President Barack Obama signed a two year extension of those tax cuts. At the end of the year, those tax cuts are set to expire and the tax rates will be raised to what they were before the Bush tax cuts. That translates into a tax increase for more than 80 percent of Americans.
So, you remember those debt limit negotiations a few months ago? Theeeey’re back! The two parties had settled on the Budget Control Act of 2012 during their negotiations to increase the nation’s debt limit.
The Act set up a “super committee” to negotiate a deal to reform taxes and reduce entitlements. In order to motivate the super committee, the Act put in place automatic spending cuts that would take place if the super committee failed to reach an agreement. The super committee did fail. That means that at the end of the year, there will be about $1 trillion of automatic spending cuts over the next 10 years beginning January 1. Half of those cuts will be to the Department of Defense’s budget.
Another thing with those debt limit negotiations: The two parties only agreed to raise the nation’s debt limit long enough to get past the elections in November. That means that around the end of the year, there will be another debate about what to do about the debt ceiling. If Congress fails to reach an agreement and does not increase the debt ceiling, the federal government will likely default on many promised payments.
Congress has steadily increased the length of time that a person can receive unemployment benefits since the recession in 2008. The last extension is set to expire at the end of 2012. While this probably wouldn’t be a problem in other years, this could present a problem when coupled with all the other cuts in the Budget Control Act.
Possible Effects of the Fiscal Cliff
The Congressional Budget Office (CBO) has expressed the concern that the fiscal cliff would slide the U.S. economy into a significant recession. According to the CBO’s report, the economy would shrink by 2.9 percent in the first half of 2013 and by 0.5 percent during the whole year. The fiscal cliff would also potentially raise the unemployment rate from 8.1 to 9.1 percent.
A positive point coming out of the fiscal cliff is that it would slow the deficit. During 2013, the CBO projects that the nation would only increase their deficit by $641 billion instead of $1.13 trillion.
Tune in to The Ready Economy Center to stay knowledgeable on breaking news, economic updates, financial tips and tutorials.
So, what are your thoughts? Comment below and tell us what you think about the fiscal cliff.