August 26, 2013 3:28 pm

Fiscal Cliff: Who? What? Where? When? Huh?

By G+ Author: Chrissy Reese.

The term fiscal cliff has been used in the past to refer to various fiscal issues. It is the popular shorthand term used to describe the conundrum that the U.S. government faced at the end of 2012, when the terms of the Budget Control Act of 2011 were scheduled to go into effect.

Among the changes that were set to take place at midnight on December 31, 2012 were 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, a rollback of the “Bush 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 - a total of $1.2 trillion over ten years - were scheduled 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.” Of the two, the tax increases were seen as the larger burden for the economy.

In the United States, the fiscal cliff was a simultaneous increase in tax rates and decrease of government spending through sequestration that would have occurred January 2013 through a series of previously enacted laws. The deficit—the amount by which government spending exceeds its revenue—was projected to be reduced by roughly half in 2013. The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely led to a mild recession with higher unemployment in 2013, followed by strengthening in the labor market with increased economic growth.


Investopedia explains ‘Fiscal Cliff’

Who actually first uttered the words “fiscal cliff” is not clear. Some believe that it was first used by Goldman Sachs economist, Alec Phillips. Others credit Federal Reserve Chairman Ben Bernanke for taking the phrase mainstream in his remarks in front of Congress. Others credit Safir Ahmed, a reporter for the St. Louis Post-Dispatch, who in 1989 wrote a story detailing the state’s education funding and used the term “fiscal cliff.”

If Congress and President Obama do not act to avert this perfect storm of legislative changes, America will, in the media’s terms, “fall over the cliff.” Among other things, it will mean a tax increase the size of which has not been seen by Americans in 60 years. - Investopedia

Fiscal Tightening [Infographic] by CBO, 2012.

Click to enlarge.

This month, Representatives from the administration were called to come to session to discuss the budget and answer questions from senators. The Legislature will be in session for the next few weeks to discuss the fiscal 2014 budget. The current fiscal year ends Sept. 30 and the new fiscal year begins the following day.

The release of PEFO (Pre-election Economic and Fiscal Outlook), commonly known as the “state of the books”, will be the final budget update before the election on September 7. The publication is an independent assessment of the current state of the budget and economic outlook made by the departments of Treasury and Finance.

The Bottom Line

When will a deal come? Nobody knows, but both sides of the aisle are admitting that fighting and bickering is not the answer. A more conciliatory political environment will give both parties a better chance at gaining control of Washington in 2016. Ultimately, when the deal comes, it will almost certainly result in some combination of tax rate increases and spending cuts. The willingness of both sides to compromise is crucial to any final agreement.

Sources: Wikipedia, CBO, Investopedia, MoneyMorning, WashingtonPost.