Fiscal Cliff

 Fiscal Cliff

  • In the United States, the “fiscal cliff” refers 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 remain unchanged. The deficit – the difference between what the governments takes in and what it spends – is projected to be reduced by roughly half in 2013.
  • Fiscal Cliff means there is a limit over which government can borrow, once the limit is breached automatic reduction in government spending and tax increases come in effect.
  • So Basically Fiscal Cliff is an increase in taxes & reduction in government spending
  • On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect. That’s equal to about four percent of GDP and can bring US economy back into recession.
  • So to avoid such disaster  US Senate will be working on Sunday ie 30th December which has happened only 18 times since 1880. If Senate is unable to come to a viable solution and fiscal cliff limits is crossed consequences will be dire as mentioned below:
  • Taxes would rise for nearly every taxpayer and many businesses.
  • Financing for most federal programs, military and domestic, would be cut.
  • More than $500 billion equals roughly 3 percent to 4 percent of gross domestic product.
  • An emergency unemployment-compensation program is expiring, which would save $26 billion but end payments to millions of Americans who remain jobless and have exhausted state benefits.
  • Medicare payments to doctors would be reduced 27 percent, or $11 billion
  • The biggest cut would be $65 billion, enacted across the board for most federal programs over the last nine months of fiscal year 2013, from January through September.

Know how the US avoids falling off the cliff?

  • Democrats and Republicans have come up with rival plans to avert the crisis. In terms of cutting the US deficit, they vary by hundreds of billions of dollars over a 10-year period.
  • President Obama wants the borrowing limit increased and raised taxes on high earners as part of any deal, but Republicans have demanded concessions such as government spending cuts.
  • Only Congress, which is controlled by the Republicans, can raise the borrowing limit. It can also still act within the next month to minimize the impact of the fiscal cliff.
  • Meanwhile, the US government has signaled it’s ready to take extraordinary measures to prevent it defaulting on its debt, but it’s unclear how much time those would buy.
  • So to avoid such disaster  US Senate will be working on Sunday ie 30th December which has happened only 18 times since 1880.