News / USA

The US 'Fiscal Cliff' Explained

A trader on the floor of the New York Stock Exchange looks at the front page of a newspaper the day after Presiden Obama was re-elected, November 7, 2012.
A trader on the floor of the New York Stock Exchange looks at the front page of a newspaper the day after Presiden Obama was re-elected, November 7, 2012.
TEXT SIZE - +
With the U.S. elections over, President Barack Obama and Congress are turning their attention to the political stalemate called the “fiscal cliff.”  It is a tangle of major spending cuts and tax increases that could stall the national economy unless Democrats and Republicans quickly forge compromises.  
 
The United States faces $600 billion in automatic tax increases and spending cuts that go into effect January 1, unless the two major political parties can reach an agreement.  
 
The cuts would affect both the military spending favored by Republicans and the social programs supported by Democrats.  President Obama's Democratic Party controls the U.S. Senate, while Republicans have a majority in the House of Representatives. 
 
On taxes, a key issue is whether to extend tax-rate reductions that have been in effect for years, but are due to expire at the end of 2012.  The reduced tax rates apply to all Americans, whatever their income.  Republican lawmakers say they want to continue all of the reduced rates; Obama and leaders of his Democratic Party have been trying to exclude this benefit extension for the country's wealthiest taxpayers - probably everyone whose family income is more than $250,000 a year. 
 
The law mandating the cuts in 2013 was intended to force lawmakers to compromise on where and how much to reduce spending and raise revenue to reduce the federal budget deficit.


What is the U.S. Fiscal Cliff?

  • An agreement intended to force politicians to compromise and make deals.
  • Without a deal by January 1, 2013, sharp spending cuts would hit military and social programs.
  • Tax hikes also would go into effect.
  • The combination would reduce economic activity, and could boost unemployment and push the nation back into recession.
No compromise so far  

Neither side has changed its position, so the effort to force compromise has been a failure, but the spending cuts and tax increases are mandatory. 
 
Leon LaBrecque, chief strategist and founder of LJPR, a firm that manages nearly $500 million in assets for investors, says, "It very difficult to believe, although possible, that Congress and the president can solve these problems before December 31."
 
Economists say that cutting spending and raising taxes so sharply would reduce demand for goods and services, slow economic growth and increase unemployment - and possibly push the United States back into recession. 
 
Josh Gordon, policy director of The Concord Coalition, a nonpartisan organization that focuses on federal budget issues, takes a more optimistic view than LaBrecque.  He says Congress and the Obama administration probably will agree at least on an outline for a compromise.  
 
Washington's annual budget deficits have been running higher than $1 trillion, pushing the total U.S. debt closer to the maximum legal limit, or debt ceiling; that limit has been adjusted upward many times during the past decade and now is about $16 trillion.  The president and Congress must decide early in the new year whether to allow debt to rise beyond $16 trillion. Obama has pledged to work for a plan that would reduce the national debt level over a period of years, but he has been unable to reach an agreement on that issue with his political opponents.

Wrangle over deficit and debt 

Former Treasury Department official Kent Smetters says a key reason for the growing debt is the spending obligations the government has on old-age pensions and medical care for the elderly and poor.  Smetters, who now teaches economics at the Wharton School of the University of Pennsylvania, says the “fiscal cliff” debate is a chance to rethink federal spending overall.

He says "the real cliff" is the mounting level of debt that discourages investors.  Smetters says Washington must make comprehensive reforms on spending and taxes with laws crafted to encourage economic growth. 
 
Pressure on the president and congressional Republicans to force themselves to agree on these issues increased after the election, when the Fitch financial rating agency said it might reduce the credit rating for U.S. financial instruments unless there is a debt compromise.  Such actions already have been taken or threatened by other rating agencies.

Fitch said political leaders from both major U.S. parties must work out a "credible" plan for deficit reduction, and find a way to raise the legal limit on government borrowing. 
 

You May Like

Algerians Vote in Presidential Election

There were few media reports of protests and clashes around the country, but so far no significant violence More

Sharks More Evolved than Previously Thought

The discovery could “profoundly affect our understanding of evolutionary history” More

Pakistan Military Asked to Protect Polio Workers

Request comes as authorities say a Taliban ban on vaccinations in 2012 and deadly attacks on anti-polio teams have prevented thousands of children from getting inoculated More

This forum has been closed.
Comment Sorting
Comments
     
by: Tauseef from: Pakistan
November 14, 2012 11:16 AM
If this is really the number one issue that the US is facing, then I am happy the U.S has a leadership that is trying to unravel the tangle before Jan 1, 2013. Hope, things works out well for the U.S and hence for the rest of the world.

Also, I have a greater degree of trust on Barack Obama to sort it out than any other leader.


by: Rob Swift from: Great Britain
November 08, 2012 5:15 PM
All our economic theories (Freidman (moneterism), Keynes etc) have vanished and lost all credibility. The entire issue is not a function of money at all. As the lights go down on the planet remember that all economic activity is at the cost of the ecology, and that is on the blink. What drives the entire (historical) process wants it gone and replaced. President Obama has done well to keep it all going.

In Response

by: J Nelson from: NY
November 09, 2012 11:19 AM
Im trying to see the real down side , we are still in a recession. In fact at this point No One wants to say it But its a Depression. ( just a controled one) CUT spending ? increase Taxes ? wow theres a thought . should have happened 10 yrs ago. I can see where this Might upset both sides . the rich might get taxed higher and the lazy might not get a welfare check Boo HOO .

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Google Buys Drone Companyi
|| 0:00:00
...
 
🔇
X
George Putic
April 15, 2014
In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
Video

Video Ray Bonneville Sings the Blues and More on New CD

Singer/songwriter Ray Bonneville has released a new CD called “Easy Gone” with music that reflects his musical and personal journey from French-speaking Canada to his current home in Austin,Texas. The eclectic artist’s fan base extends from Texas to various parts of North America and Europe. VOA’s Greg Flakus reports from Austin.
Video

Video Millions Labor in Pakistan's Informal Economy

The World Bank says that in Pakistan, roughly 70 percent work in the so-called informal sector, a part of the economy that is unregulated and untaxed. VOA's Sharon Behn reports from Islamabad on how the informal sector impact's the Pakistani economy.
Video

Video Passover Celebrates Liberation from Bondage

Jewish people around the world are celebrating Passover, a commemoration of their liberation from slavery in Egypt more than 3,300 years ago. According to scripture, God helped the Jews, led by Moses, escape bondage in Egypt and cross the Red Sea into the desert. Zlatica Hoke reports that the story of the Jewish Exodus resonates with other people trying to escape slave-like conditions.
Video

Video Police Pursue Hate Crime Charges Against Kansas Shooting Suspect

Prosecutors are sifting through the evidence in the wake of Sunday’s shootings in a suburb of Kansas City, Missouri that left three people dead. A suspect in the shootings taken into custody is a white supremacist. As VOA’s Kane Farabaugh reports, he was well-known to law enforcement agencies and human rights groups alike.
Video

Video In Eastern Ukraine, Pro-unity Activists Emerge from Shadows

Amid the pro-Russian uprisings in eastern Ukraine, there is a large body of activists who support Ukrainian unity and reject Russian intervention. Their activities have remained largely underground, but they are preparing to take on their pro-Moscow opponents, as Henry Ridgwell reports from the eastern city of Donetsk.
Video

Video Basket Maker’s Skills Have World Reach

A prestigious craft show in the U.S. capital offers one-of-a-kind creations by more than 120 artists working in a variety of media. As VOA’s Julie Taboh reports from Washington, one artist lucky enough to be selected says sharing her skills with women overseas is just as significant.
Video

Video UN Report Urges Speedier Action to Avoid Climate Disaster

A new United Nations report says the world must switch from fossil fuels to cleaner energy sources to control the effects of climate change. The Intergovernmental Panel on Climate Change released the report (Sunday) following a meeting of scientists and government representatives in Berlin. The comprehensive review follows two recent IPCC reports that detail the certainty of climate change, its impacts and in this most recent report what to do about it. VOA’s Rosanne Skirble has the details.
AppleAndroid