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.
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

Video On The Scene: In Ethiopia, 'Are You a Journalist?' Is a Loaded Question

VOA's Anita Powell describes the difficulties faced by reporters in fully conveying the story in a country where people are reticent to share their true opinions More

Nigerians Await New President With High Hopes

When pomp and circumstance of inauguration end in Abuja, Buhari will sit down to the hard task of governing Nigeria More

India's Restrictions on Several NGOs Raise Concerns

Political analysts link recent clampdown on advocacy groups to report last year that said foreign-funded NGO’s negatively impact economic development 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.
Expelled from Pakistan, Afghan Refugees Return to Increased Hardshipi
X
Ayesha Tanzeem
May 28, 2015 6:48 PM
Undocumented refugees returning to Afghanistan from Pakistan have no jobs, no support system, and no home return to, and international aid agencies say they and the government are overwhelmed and under-resourced. Ayesha Tanzeem has more from Kabul.
Video

Video Expelled from Pakistan, Afghan Refugees Return to Increased Hardship

Undocumented refugees returning to Afghanistan from Pakistan have no jobs, no support system, and no home return to, and international aid agencies say they and the government are overwhelmed and under-resourced. Ayesha Tanzeem has more from Kabul.
Video

Video Britain Makes Controversial Move to Crack Down on Extremism

Britain is moving to tighten controls on extremist rhetoric, even when it does not incite violence or hatred -- a move that some are concerned might unduly restrict basic freedoms. It is an issue many countries are grappling with as extremist groups gain power in the Middle East, fueled in part by donations and fighters from the West. VOA’s Al Pessin reports from London.
Video

Video Floodwaters Recede in Houston, but Rain Continues

Many parts of Texas are recovering from one of the worst natural disasters to hit the southwestern state. Heavy rains on Monday and early Tuesday caused rivers to swell in eastern and central Texas, washing away homes and killing at least 13 people. As VOA’s Greg Flakus reports from Houston, floodwaters are receding slowly in the country's fourth-largest city, and there likely is to be more rain in the coming days.
Video

Video 3D Printer Makes Replica of Iconic Sports Car

Cars with parts made by 3D printers are already on the road, but engineers are still learning about this new technology. While testing the possibility of printing an entire car, researchers at the U.S. Department of Energy recently created an electric-powered replica of an iconic sports roadster. VOA’s George Putic has more.
Video

Video Al-Shabab Recruitment Drive Still on In Kenya

The al-Shabab militants that have long battled for control of Somalia also have recruited thousands of young people in Kenya, leaving many families disconsolate. Mohammed Yusuf recently visited the Kenyan town of Isiolo, and met with relatives of those recruited, as well as a many who have helped with the recruiting.
Video

Video US Voters Seek Answers From Presidential Candidates on IS Gains

The growth of the Islamic State militant group in Iraq and Syria comes as the 2016 U.S. presidential campaign kicks off in the Midwest state of Iowa.   As VOA’s Kane Farabaugh reports, voters want to know how the candidates would handle recent militant gains in the Middle East.
Video

Video A Small Oasis on Kabul's Outskirts Provides Relief From Security Tensions

When people in Kabul want to get away from the city and relax, many choose Qargha Lake, a small resort on the outskirts of Kabul. Ayesha Tanzeem visited and talked with people about the precious oasis.
Video

Video Film Festival Looks at Indigenous Peoples, Culture Conflict

A recent Los Angeles film festival highlighted the plight of people caught between two cultures. Mike O'Sullivan has more on the the Garifuna International Film Festival, a Los Angeles forum created by a woman from Central America who wants the world to know more about her culture.
Video

Video Kenyans Lament Losing Sons to al-Shabab

There is agony, fear and lost hope in the Kenyan town of Isiolo, a key target of a new al-Shabab recruitment drive. VOA's Mohammed Yusuf visits Isiolo to speak with families and at least one man who says he was a recruiter.
Video

Video Scientists Say Plankton More Important Than Previously Thought

Tiny ocean creatures called plankton are mostly thought of as food for whales and other large marine animals, but a four-year global study discovered, among other things, that plankton are a major source of oxygen on our planet. VOA’s George Putic reports.
Video

Video Kenya’s Capital Sees Rise in Shisha Parlors

In Kenya, the smoking of shisha, a type of flavored tobacco, is the latest craze. Patrons are flocking to shisha parlors to smoke and socialize. But the practice can be addictive and harmful, though many dabblers may not realize the dangers, according to a new review. Lenny Ruvaga has more on the story for VOA from Nairobi, Kenya.
Video

Video Iowa Family's Sacrifice Shaped US Military Service for Generations

Few places in America have experienced war like Waterloo. This small town in the Midwest state of Iowa became famous during World War II not for what it accomplished, but what it lost. As VOA’s Kane Farabaugh reports, the legacy of one family’s sacrifice is still a reminder today of the real cost of war for all families on the homefront.

VOA Blogs