What is the Fiscal Cliff?

"The Fiscal Cliff," a term once hidden in the shadows of the election, has now moved to the forefront of our political agenda. A recent poll found that 71% of Americans are following the Fiscal Cliff "very or somewhat closely" in the news-10% higher than average[1]. Perhaps this is because most Americans will likely feel the effects of the Fiscal Cliff. At Secrest Blakey & Associates, we feel it's important for you to be informed, to understand what the Fiscal Cliff is, who to watch in the coming weeks, and how to prepare for the changes the Cliff may bring.

In January 2013, a series of federal tax increases and spending cuts are scheduled to begin in an effort to reduce the national debt. The fear is that if these events happen all at once, the U.S. economy will fall off a "Fiscal Cliff," and into another recession. The primary factors that have positioned us at the edge of the Fiscal Cliff include the national debt, the Budget Control Act, and the expiration of Bush-era tax cuts.

America has approximately $16 trillion of debt. That's about 70% of our Gross Domestic Product (GDP.[2] Divided among the 314 million America citizens, each of us would owe roughly $51,000. With statistics like these, it's easy to see the growing concern over our national debt.

In an effort to address the debt, Congress enacted the Budget Control Act last summer, mandating automatic, federal spending cuts to begin in January 2013.[3] The severity of the cuts was supposed to pressure congress into creating a debt reduction plan, though no plan was ever resolved. Unfortunately, the federal spending cuts that will begin in January 2013 coincide with the expiration of many Bush-era tax cuts.

Spending cuts and increased taxes coupled with the fragile state of the current economy have led us to the Fiscal Cliff. Many fear a double-dip recession, though that outcome is not guaranteed. Congress can still amend the changes set for January, so long as Congressional Republicans and Democrats can collaborate on a debt reduction plan. Should they fail, however, tax increases and budget cuts will hit America all at once.

[1] Hobson, J. (Performer) (2012). Failure to resolve fiscal cliff will impact jobs [Radio series episode]. In Marketplace Morning Report. American Public Media.

[2] Between a mountain of debt and a fiscal cliff. The Committee for a Responsible Federal Budget, Retrieved from http://www.crfb.org. 8.

[3] Konigsberg, C. (2012, July 30). How to avoid 'lunatic' fiscal cliff. CNN Money. Retrieved from http://money.cnn.com.