The Fiscal Cliff
What is the fiscal cliff?
Congress faces over $7.5 trillion in decisions, commonly known as the "fiscal cliff," that must by made by the end of the year. If Congress does not act, in January 2013, we will face a combination of severe budget cuts (known as “sequestration”) and tax increases from expiring provisions. Federal Reserve Chairman Ben Bernanke said this massive fiscal cliff could completely derail our economy.
For a good overview, I recommend reading the Washington Post’s “The Fiscal Cliff: Absolutely everything you could possibly need to know, in one FAQ."
- The brutal, across-the-board cuts are known as sequestration. These cuts are like using a lawnmower to cut your grass – and your garden. Last year’s bipartisan Budget Control Act established the Super Committee to recommend a deficit reduction package. In the event that the Super Committee failed, the Budget Control Act provided for brutal across-the-board cuts – called sequestration – to reduce the deficit by over $1 trillion. This was only set up as a mechanism to force action, not as good fiscal policy. Very few federal programs would be exempt, and the Department of Defense would receive the brunt of the cuts.
- The expiring provisions include, among other things, extended unemployment insurance; the “Bush” tax cuts of 2001 and 2003; the payroll tax cut enacted by President Obama in 2009; and various tax provisions such as the research and development tax credit and the state and local sales tax deduction. How would you be affected by the indiviual tax changes? Check out the Wall Street Journal's interactive graphic, Falling Over the Fiscal Cliff.
Why is this important?
The Congressional Budget Office has said that without a plan to avoid the fiscal cliff, our country could fall back into a recession in 2013.
Credit agencies have issued warnings that the U.S. credit rating will be lowered if Congress fails to act.
NPR recently ran a story about "How the Fiscal Cliff Would Hit the Economy."
Links & Additional Information
Fiscal Cliff Fiscal Cliff Costs
CRFB’s Budget Simulation Exercise
