What Happens if We Go Over the Fiscal Cliff?

Source: 401 (K) 2012

If the political parties in Washington fail to reach a budget agreement, the nation's economy could slide back into recession

Sarah Goodman

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The term ‘fiscal cliff’ has been thrown around quite frequently in the past few weeks. It has a negative connotation, but little is known about what will really happen if the United States goes over it.

Contrary to its name, the fiscal cliff does not mean that the U.S. economy will go hurtling down into a chasm of bankruptcy and recession. ‘Fiscal Cliff’ is simply a nickname assigned by the Budget Control Act of 2011. The reason this act is now an issue is that it will begin to go into effect in less than three weeks, at midnight on December 31, 2012. President Obama signed the act as a compromise to increase the debt ceiling during the debacle last year, and it provides for a series of spending decreases and tax increases that would go into effect at various times after the year 2012 concludes.

The tax increases would not be a new thing, as they would primarily be the expiration of the Bush tax cuts. Income and payroll taxes would increase as well, with around 2 million Americans losing unemployment benefits. The payment to doctors when they treat Medicare patients would decrease 27%. The bill calls for 917 billion in spending cuts accross the board over the next 10 years. Social security, Medicaid, federal pay, pensions and veterans’ benefits are exempt from these cuts, though military spending is not. Many government programs would be cut, resulting in a projected 1.5 million government job losses in 2013.

U.S. lawmakers put this in place partially as a deadline for them to work together on the economy and make cuts that would limit damage to the country. Both parties have sharply different agendas at the moment, but if there is not bipartisan cooperation in either revoking or amending this budget, the economy will likely fall again into recession. The average American will not feel the effects of this act the first day it goes into action, but if politicians in Washington cannot come to a consensus to avoid its automatic launch, the country will suffer.

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One Response to “What Happens if We Go Over the Fiscal Cliff?”

  1. JPFAU on December 17th, 2012 1:04 pm

    very informative, are there any historical precedents of similar ‘fiscal cliffs’?

What Happens if We Go Over the Fiscal Cliff?