Fiscal cliff refers to a range of expiring tax cuts & a number of planned spending hikes. These include the Bush tax cuts & the indexation of the AMT (alternative minimum tax) for inflation.
Fiscal Cliff will come in place on January 1, 2013 which would include a combination of spending cuts & tax increases.
In February 2012, Ben Bernanke, chairman of the US Federal Reserve, used the term first while describing the challenges facing the US & global economy.
The tax cuts during the regime of George Bush in 2001 & 2003 reduced individual income taxes. They were extended in 2010 to support the economic recovery. This extension is set to expire on December 31, 2012. Another large part of the cliff is the 2% point payroll tax break for calendar years 2011 & 2012 that was part of the government’s efforts to strengthen the recovery after the recession.
On the spending front, it consists of a range of other changes in revenues & spending that add up to $ 16,000 Crore. The most conspicuous are the $ 1, 800 taxes for Obamacare, the expiration of the emergency unemployment benefits ($ 2,600 Crore) and the $ 1,100 crore reduction in Medicare’s payment rates for physicians. That makes the total fiscal cliff $ 60,700 Crore.
This would mean higher taxes & reduced spending that would result in reducing the budget deficit for fiscal year 2013 to 4% of GDP (gross domestic product), down from 7.3% in 2012, a substantial improvement in the federal debt trajectory.
However, it would also send a massive negative fiscal impulse through the economy, as businesses & households are hit by higher taxes & a decline in government spending on goods & services.
According to estimates by the CBO (Congressional Budget Office), The full fiscal cliff of $ 60,700 Crore would lead to a recession in the first half of 2013, and shrink the economy during 2013 by 0.5% (measured from 2012 Q4 to 2013 Q4).
In the victory speech, US President Mr. Obama listed “reducing our deficit & reforming our tax code” as among his top priorities. He is expected to initiate a new round of talks with leaders of Congress. The goal would be a “grand bargain” combining higher taxes and money-saving changes to federal benefit programs. However, congressional Republicans are against the increase in taxes and reduction in spending, and convincing them would be a tough task for the President.
Src: BS
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