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November 12th, 2012

What is the “Fiscal Cliff” and Should We Fear it?


Now that the American people have decided to give President Barack Obama another four years, lawmakers have less than two months to avoid the “fiscal cliff” – a set of dramatic budget cuts and tax increases designed to force Congress to find a way to tackle the country’s staggering debt.

John Boehner (R-OH) took the stage after President Obama’s reelection was announced to say that he and House Republicans were prepared to work with the President to find a compromise before the January 1 “fiscal cliff”.

The “fiscal cliff” refers to automatic tax increases and spending cuts that are set to take effect in January 2013 and will reduce the federal budget deficit by a projected $560 billion.  The measures are a result of the Budget Control Act (BCA) of 2011, a deal President Obama signed in August of 2011 that helped end the battle in Congress over whether to raise the “debt ceiling,” a cap set by Congress on the amount of money the federal government can legally borrow.

The idea was to threaten cuts to all government programs, including the military and projects that are dear to the hearts of both Democratic and Republican lawmakers, so that they would be forced to bargain and come to an agreement.

What is the difference between deficit and debt?

The phrase “fiscal cliff” was coined by Federal Reserve Chairman Ben Bernanke in February 2012 when he stated in front of Congress that without action the U.S. faced, “a massive fiscal cliff of large spending cuts and tax increases” on Jan. 1, 2013.

Congress created the Budget Control Act to reduce the record-high deficit. Currently, the federal budget deficit, the nation’s annual shortfall, is around $1.1 trillion. The nation’s “debt” is the shortfalls of all years added together and rolled up in a big pile of numbers that at this point is reaching toward the sky. On George W. Bush’s last day in office the US public debt was over $10 trillion. Currently it is around  $16 trillion.

House Minority Leader Nancy Pelosi (D-CA) said that any plan she or the President will endorse will include an extension of the middle class tax cuts.

What might happen at the fiscal cliff?

If the “fiscal cliff” cuts take effect, it would be the largest single act of deficit reduction in more than 40 years. However, the roughly $100 billion in cuts to government agencies, and $400 billion in tax hikes could harm the improving, but still fragile, American economy.

Many of the tax increases are actually the expiration of tax breaks passed during President Bush’s term that were then extended by President Obama.

If Congress and the president cannot compromise before the midnight December 31 deadline, experts agree that the economy will suffer in the short term.

The Congressional Budget Office predicts that a recession would occur in the first half of next year and about 1.4 million fewer jobs would be created in 2013.

It’s all politics

Whether or not we encounter the fiscal cliff in January depends on how well politicians in Washington can compromise by the January 1 deadline. Like the debt ceiling before it, the fiscal cliff may be used as a negotiating piece to extract uncomfortable agreements out of Republicans and Democrats in Congress.

Both parties would like to reduce the budget deficit, but have different ideas on how to accomplish this. Republicans would like to cut spending without increasing taxes to raise additional revenue. Many Republicans in office today have signed a pledge saying that under no circumstances will they ever raise taxes. They worry that if the debt grows any larger, it will disturb economic growth in the future and make it harder for the government to borrow money at reasonable rates.

Democrats, on the other hand, would like to use a combination of tax increases on the wealthy and less drastic spending cuts to reduce the deficit. They worry that too many cuts to federal programs will have negative effects on consumer spending, government workers and programs for the poor such as food and education.

The answer to whether the two sides can come together will become clear in the next few weeks.
–Compiled by Allison McCartney for NewsHour Extra

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