In the United States, the fiscal cliff is a term used to refer to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws are not changed by the end of 2012. The deficit—the difference between what the government takes in and what it spends—is expected to be reduced by roughly half beginning in the first days of 2013. This sharp decrease in the deficit in such a short period of time is known as the fiscal cliff. However, the Congressional Budget Office estimates this sudden reduction will probably lead to a mild recession in early 2013.
Because of the short-term impact on the economy, including a possible recession, the fiscal cliff has stirred intense commentary both inside and outside of Congress and has led to calls to extend some or all of the tax cuts, and to replace the across-the-board reductions with more targeted cutbacks. The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes or increasing spending. The protracted negotiations over this have also generated heightened policy uncertainty over the eventual tax and spending landscape in the US.
The Budget Control Act was a compromise intended to resolve a dispute concerning the public debt ceiling. Some major programs, like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans' benefits, are exempted from the spending cuts. Spending for defense, federal agencies and cabinet departments would be reduced through broad, shallow cuts referred to as budget sequestration.
The United States public debt would continue to grow even if no mitigating actions are taken to avoid the fiscal cliff. Over the next ten years, projected increases in the debt would be lowered by as much as $7.1 trillion or about 70%, resulting in a considerably lower ratio of debt relative to the size of the economy. For the first year (from fiscal year 2012 to 2013), federal tax revenues are projected to increase by 19.63%, while spending outlays are expected to decline by 0.25%. These changes would raise 2013 tax revenue to 18.4% GDP, above its historical average of 18.0% GDP, while reducing spending to approximately 22.4% GDP, still above the 21.0% GDP historical spending average.
The US debt-ceiling became involved in the fiscal cliff debate when Treasury Secretary Timothy Geithner introduced the President's authority to raise the country's borrowing limit as a part of his first formal proposal. Although not strictly part of the fiscal cliff, the current debt-ceiling will also expire around the end of the year, unless "extraordinary measures" are used.
http://en.wikipedia.org/wiki/Fiscal_c...
The U.S. Economy, Middle-Class Tax Cuts and the Fiscal Cliff (2012) | |
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