What is the U.S Fiscal Cliff?

In recent weeks,leading up to the recent US presidential election, there has been a lot of press coverage of the U.S “Fiscal Cliff”. However, now that the presidential election is over, the debate surrounding the Fiscal Cliff is taking centre stage. But what exactly is the “Fiscal Cliff”?

The Fiscal Cliff is used to describe the combination of the expiration of several fiscal stimulus measures and additional tax increases along with spending cuts.

When is the Fiscal Cliff due?

Some of the fiscal stimulus measures date back to the Bush era with several tax cuts expiring on January 1st 2013 from that period. This is along with the expiration of the 2% cut in payroll taxes that were passed in December 2010. A 10% cut in defense spending is due to take place in 2013 along with an 8% cut in domestic programs.

How much is it?

The Sequester(budget deficit reduction) is estimated to be $1.2 trillion. To illustrate the enormity of that number, $1.2 trillion budget deficit reduction represents an approximate 8% reduction of the U.S GDP. The result of this budget deficit reduction has been defined as the newly coined term “taxmageddon”, an expression that sums up what the chairman of the Federal Reserve Bank, Ben Bernanke has said about the potential threat of the Fiscal Cliff; “could be disastrous”.

The associated large reduction in the budget deficit is thought to create a projected slowdown of the economy contingent on whether specific laws are allowed to go into effect.

These laws include tax increases due to the expiration of the Tax Relief, Unemployment Insurance, Reauthorisation and Job Creation Act of 2010 and the spending reductions under the Budget Control Act 2011

What are the implications of the Fiscal Cliff?

The implications of the Fiscal Cliff are essentially seeing the economy enter a shallow recession which will in turn cause business leaders to attempt to reduce operating costs which ultimately will lead to fewer job opportunities. The source of most concern stems from what will happen to the economy when there is a combination of a negative GDP and increased unemployment.

So far a comprehensive approach to addressing the Fiscal Cliff has yet to be presented while time is quickly running out. Much depends on the outcome of the U.S Fiscal Cliff and the world is yet to see the second act.