What is the Fiscal Cliff?

12 07 2012

Basically, the Fiscal Cliff refers to the expiration of several tax cuts at the end of 2012 enacted under President George W. Bush, as well as mandatory spending cuts resulting from the debt ceiling fight last summer.

The effect on the economy could be dramatic. Although the combination of higher taxes and spending cuts would reduce the current deficit by an estimated $560 billion, GDP is estimated to decrease by four percentage points in 2013, which would send the economy into a recession once again.

The fact that we are still in the midst of recovery from the Great Recession, approaching the edge of this Fiscal Cliff seems imminent.

Earlier this week, President Obama proposed that rather than letting the Bush Tax Cuts expire, they could be extended for families making less than $250,000 a year. It is unlikely that a tiered plan like that would pass in Congress, continuing the political stalemate.

This will most likely have an effect on the economy before 2013 even begins. The Congressional Budget Office anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes.  This could then lead to a possible reduction in GDP in the second half of 2012.

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