By Jueseppi B.
The Mumbo Jumbo:
The United States fiscal cliff refers to the effect of a series of enacted legislation which, if unchanged, will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit at the end of 2012. These laws include tax increases due to the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the spending reductions (“sequestrations”) under the Budget Control Act of 2011.
The Congressional Budget Office reported an increased risk of recession during 2013 if the deficit is reduced suddenly, while indicating that lower deficits and debt over time improve long-term economic growth prospects. The deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion or about 70%. The year-over-year changes for fiscal years 2012-2013 include a 19.63% increase in revenue and 0.25% reduction in spending.
Some major domestic programs, like Social Security, federal pensions and veterans’ benefits, are exempted from the spending cuts. Spending for federal agencies and cabinet departments, including defense, would be reduced through budget sequestration.
Confused even more? Maybe this will help:
By Thomas Kenny, About.com Guide
“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
- They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
- They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
- They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Can a Compromise be Reached?
The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases.
Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. The most likely result, in any event, is that the problem will linger at least until after the election, and there’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3.
The most likely result is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. The election will almost certainly have an impact on the direction of future policy, particularly if one party earns a decisive victory. Nevertheless, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.
Possible Effects of the Fiscal Cliff
If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs.
A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sun setting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.
The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP by a full half-percent in the second half of 2012.
Having said this, it’s important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes – while destructive over a full year – will be gradual at first. What’s more, Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won’t necessarily be an impediment to growth even if Congress doesn’t address the issue until after 2013 has already begun.
By Jeanne Sahadi
NEW YORK (CNNMoney) — With the elections out of the way, the time to actually govern has arrived. And the pending fiscal cliff will test everyone’s mettle.
The fiscal cliff is the legislative equivalent of a slow-motion train wreck that Congress and President Obama can avoid … but only if they work together.
Some seasoned Washington observers think they will do just that, despite their troubled history, because they don’t want to be blamed for what happens if they fail.
But others say there’s a good chance they won’t because the election did nothing to ease the partisan chasm overtaxes. They argue that only a market crash or a crisis over the country’s debt ceiling will force their hand. (CNN.com: 5 things we learned on Election Night)
The fiscal cliff — which starts to take effect in January — includes $7 trillion worth of tax increases and spending cuts over a decade. In addition, the debt ceiling will need to be raised by early next year.
Among the fiscal cliff policies at issue: reductions in both defense and non-defense spending; the expiration of the Bush tax cuts; the end of a payroll tax holiday and extended unemployment benefits; and the onset of reimbursement cuts to Medicare doctors.
Lawmakers must choose whether to leave those measures in place, replace some or all of them, postpone them or cancel them entirely. Their decision will affect the economy, the country’s credit rating and the U.S. debt burden.
“Failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013,” Fitch Ratings warned on Wednesday.
If left in place, the fiscal cliff would lead to the biggest single-year drop in the annual deficit as a percent of the economy since 1969.
But because it would be so abrupt and arbitrary, it also could throw the United States back into a recession next year, when more than $500 billion will be taken out of the economy. (Related: Americans face $3,500 fiscal cliff hit)
Tax hike on the rich is key: Like many Democrats and Republicans, the president doesn’t like the automatic, across-the-board spending cuts called for under the so-called sequester. He wants them replaced.
But the White House has indicated Obama won’t accept a package that just reverses the defense cuts, as the Republicans want. And senior administration officials said recently that Obama would veto any fiscal cliff package that extends the Bush tax cuts for top earners, a key Republican demand.
The president himself hasn’t used the word “veto.” Instead, he has urged Congress to “work on those things we can agree on” — namely, to extend the Bush tax cuts for the majority of Americans.
On Wednesday, House Speaker John Boehner held fast to the Republican line that no one’s tax rates should go up.
“We won’t solve the problem of our fiscal imbalance overnight,” he said. “And we certainly won’t solve it by simply raising tax rates or taking a plunge off the fiscal cliff.”
In an interview with the Des Moines Register before his re-election, Obama expressed confidence that a “grand bargain” on debt reduction could occur within six months of his second term.
Indeed, some expect that Obama will put out a new debt-reduction proposal soon after the elections, said Steve Bell, the economic policy director of the Bipartisan Policy Center.
But lawmakers and policy experts also say the most they expect to happen before the end of the year will be for Congress to pass a “bridge” or “framework” package that tees-up the next Congress to do the heavy lifting.
No easy way out: Congressional scholar Norman Ornstein sees one of three outcomes. In one, 70 senators and major business leaders lock arms on a framework deal that includes raising revenue for deficit reduction. Obama endorses it and pressures the House to at least vote on it.
Such a framework might mean lawmakers postpone fiscal cliff measures for several months, and agree to strike a large deficit-reduction deal by a date certain next year according to agreed-upon targets for spending and revenue.
Another possibility, Ornstein said, is that Obama meets resistance from House Republicans. So he takes a hard line and lets the country go over the cliff, only to introduce on Jan. 1 what he’d characterize as one of the biggest tax cuts in American history — for everyone except the top 1%.
A third option, Ornstein suggested, is that everybody agrees to postpone the fiscal cliff until March, to give more time to work out a deal, and to keep the economy from slipping into recession in January.
“Any of these could happen, none are ideal,” Ornstein said. “One wild card, of course, is the reaction of the markets.”
–CNN Senior Congressional Producer Deirdre Walsh contributed to this report.
Bottom line is Congress created this “fiscal cliff” problem because Congress kicked the proverbial can down the block as usual, rather than work as a team to handle this issue way back when. The reason they kicked this particular can down the street was politics.
Congress, the TeaTardedRepubliCANTS that is, didn’t care to work with President Barack Hussein Obama on this “fiscal cliff”, because Congress assumed they would have a NEW, caucasian, Mitt Romney to bend to their will.
Assume = Ass out of U and Me.
This fiscal cliff garbage is ALL the fault of Congress, who takes as many breaks from doing the job Congress was elected to do: GOVERNING, as a $3 hooker during a hurricane.
The more things change…….