What is the fiscal cliff?
Dec. 14, 2012
You’ve probably been hearing a lot about the “fiscal cliff” in the news lately with dire predictions about the effect on the U.S. economy if President Obama, the Republican majority in the U.S. House and Democratic majority in the Senate can’t resolve their budget differences.
So just what is the fiscal cliff? It refers to an estimated $560 billion in automatic tax increases and spending cuts scheduled to take effect on Jan. 1 to reduce the federal budget deficit. (The budget deficit is the nation’s annual shortfall, which is around $1.1 trillion. The U.S. debt is the budget shortfalls of all the years put together and stands at $16 trillion.) The effect of major tax increases and spending cuts occurring at the same time would be very damaging to the weak economy, many analysts say. Economic growth would decline as consumers and business slow their spending, and unemployment could rise above 9 percent, the Congressional Budget Office says.
First, let’s look at the tax increases and spending cuts. Big tax cuts passed in 2001 and 2003 will expire at the end of the year, meaning that nearly everyone who pays taxes will get a smaller paycheck. The across-the-board spending cuts of $100 billion would affect most military programs as well as domestic programs, such as Medicare.
How did we get to this point? It’s complicated, but the current situation is the partly the result of a 2011 compromise between Obama and Congress over raising the debt ceiling, which is the amount of money that that government can borrow from itself to pay its bills. The compromise, called the Budget Control Act of 2011, included major spending cuts that would take effect automatically if the president and Congress couldn’t agree on $1.2 trillion in savings by Jan. 1. It was supposed to force them to agree on a deal before the end of the year. They haven’t yet, and it’s going down to the wire to find a solution.
How can the fiscal cliff be avoided? The president and Congress have to agree on a budget policy. Both Democrats and Republicans want to reduce the deficit, but don’t agree on how to accomplish that goal. Republicans argue for government spending cuts without tax increases. Democrats want less drastic spending cuts combined with tax increases for the rich.
By the way, the term “fiscal cliff” was used by Federal Chairman Ben Bernanke when he testified before Congress in February 2012, warning that “on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.” Others seized on the term to describe the dramatic consequences of what was coming.
What do you think?
Which proposal do you agree with? Is there room for compromise? Should both parties allow the automatic tax increases and spending cuts take effect? Should just some be canceled?
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