The fiscal cliff, the precipitously named financial obstacle splashing around the news these days, refers to the decline in the budget deficit that would have occurred in 2013 without congressional intervention.
Previously enacted laws would have required increases in taxes accompanied by spending reductions for many parts of the United States government. Congress members avoided the cliff with legislation enacted in the final moments of 2012.
The budget deficit is the amount that the government’s spending surpasses the revenue, which is usually obtained through taxes. The deficit was planned to be reduced by half in 2013.
According to a report from the Congressional Budget Office, this stiff drop was coined the “fiscal cliff” because some projected the changes would lead to a short-term recession in an already shaky economy.
Two previously enacted laws formed the crux of the fiscal cliff, the 2010 Tax Relief Act and the Budget Control Act of 2011.
The 2010 Tax Relief Act is more commonly known as the Bush tax cuts, which were set to expire at the end of 2012.
The Budget Control Act of 2011 was a compromise enacted over debate regarding raising the debt ceiling and the impasse experienced by Congress in its failed attempts to agree upon the budget. This bill included strong incentives for Congress to reduce the budget in the future, which would have gone into effect in 2013.
Congress needed to choose how best to reduce government spending by $1.2 trillion or face across-the-board automatic cuts in discretionary spending. This process is called budget sequestration.
“The sequester was designed to be undesirable – something that would make Congress and the President come to a deal to reduce future deficits targeting the real sources of long-term deficits, mandatory spending,” University of Wyoming Economics Professor Anne Alexander said.
“But, since it’s still being debated, the sequester, if it happens, would be untargeted, un-strategic, across the board spending cuts in discretionary spending,” Alexander said.
President Barack Obama signed the American Taxpayer Relief Act of 2012 into law Jan. 2, a day when most Americans were breaking their New Year’s resolutions.
According to analysts from the Wall Street Journal, the bill enacted by Congress in the nick of time reduced the fiscal cliff—or more specifically the tax hike.
Government revenue reportedly will only fall by $157 billion rather than $487 billion. As for sequestration, Congress voted to delay addressing the issue for two more months, causing criticism from fiscal conservatives.
The fiscal cliff was reduced to perhaps a triple diamond ski slope and ultimately rescheduled.
