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What Is the Fiscal Cliff and How Will It Impact the Economy?

Dec. 6, 2012
Investing, Investing Data
What is the Fiscal Cliff?
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by Susan Lyon

What is the fiscal cliff, and how is it going to help or hurt our economy come 2013?  The fiscal cliff could lower the national deficit by about $607 billion in 2013 – and even more in the years to follow if current policies are allowed to take place – but this would all happen at a likely high cost to jobs and our economy. 

Due to a combination of expiring tax cuts and new spending cuts, if Congress does not act within the month we could be about to see $607 billion of deficit reduction take place heading into 2013 – more likely closer to $560 billion incorporating in the likely economic feedback to such large changes.  Simply put, a vast number of policy changes are set to kick in approximately all at the same time.

What Happens If We Go Over the Cliff?

Though our current deficit is certainly a problem, so too could be the fiscal cliff if we go tumbling over it.  Reducing the deficit is a wise idea for a variety of reasons, but doing it so abruptly in such a large quantity all at once is likely to shock our economy in other ways.

In addition to reducing the deficit, the CBO estimates that it could have adverse affects on economic growth, job creation, and tax rates.

  1. Deficit Reduction: The largest single debt reduction in U.S. history, it would reduce the deficit $607 billion in 2013 – 5.1% of the deficit. 
  2. Tax Increases: Almost 90% of Americans’ taxes would go up, with the average taxpayer’s bill going up by $3,446 in 2013.
  3. Jobs: Unemployment could spike up to 9.1%by Q4 2013.
  4. Economic Contraction: Real GDP could drop by 0.5% in 2013leading to possible recession, while financial markets could suffer due to increased capital gains taxes and investor panic.

What Is The Most Likely Fiscal Cliff Outcome?

While it’s unlikely that every element of the fiscal cliff detailed above will come to fruition, it is almost inevitable that many of them will.  Either way, Congress and Obama will need to make a deal – and the ongoing talks have been very bitter.

Obama is pushing for a tax plan that will benefit poor and middle class Americans while increasing taxes on the very rich; others argue that this will hurt our stock markets too much and should be avoided at all costs.

 The Fix:

Congress must either reach a deal by end of 2012 or push the decision to next year.  Then, once the fiscal cliff crisis is solved, Congress must tackle next:

  • Debt Ceiling: vote to raise it by mid-February 2013
  • Continuing Resolution: pass new federal budget by March 27, 2013




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