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

Photogallery Americans Celebrate Thanksgiving With Feasts, Festivities

Holiday traditions include turkey dinners, 'turkey trots,' American-style football and New York parade with giant balloons More

Video For Obama, Ferguson Violence is a Personal Issue

With two years left in term, analysts say, president has less to lose by taking conversation on race further More

Video Italian Espresso Expands Into Space

When Italian astronaut Samantha Cristoforetti headed for the ISS, her countrymen worried how she would survive six months drinking only instant coffee 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.
South Africa Sees Male Circumcision as Way to Reduce HIV Infectionsi
X
November 28, 2014 3:31 PM
South Africa remains plagued by AIDS despite massive government and NGO efforts on prevention and life-sustaining Anti-Retro-Viral programs. But the country has opened up another front to reduce new HIV infections: promoting circumcision. Emilie Iob reports for VOA News from a pioneering circumcision center in Orange Farm, Johannesburg.
Video

Video South Africa Sees Male Circumcision as Way to Reduce HIV Infections

South Africa remains plagued by AIDS despite massive government and NGO efforts on prevention and life-sustaining Anti-Retro-Viral programs. But the country has opened up another front to reduce new HIV infections: promoting circumcision. Emilie Iob reports for VOA News from a pioneering circumcision center in Orange Farm, Johannesburg.
Video

Video To Make A Living, Nairobi Street Vendors Face Legal Hurdles, Physical Violence

The Nairobi City Council has been accused of brutality in dealing with hawkers in the Central Business District - in order to stop them from illegally selling their wares on the streets. Lenny Ruvaga has more for VOA News from the Kenyan capital.
Video

Video For Obama, Ferguson Violence is a Personal Issue

Throughout the crisis in Ferguson, Missouri, President Barack Obama has urged calm, restraint and respect for the rule of law. But the events in Ferguson have prompted him to call — more openly than he has before — for profound changes to end the racism and distrust that he believes still exists between whites and blacks in the United States. VOA White House correspondent Luis Ramirez reports.
Video

Video Online Magazine Gets Kids Discussing Big Questions

Teen culture in America is often criticized for being superficial. But an online magazine has been encouraging some teenagers to explore deeper issues, and rewarding their efforts. VOA religion reporter Jerome Socolovsky went to this year’s Kidspirit awards ceremony in New York.
Video

Video US Community Kicks Off Thanksgiving With Parade

Thursday is Thanksgiving in the United States, a holiday whose roots go back to the country's earliest days as a British colony. One way Americans celebrate the occasion is with parades. Anush Avetisyan takes us to one such event on the day before Thanksgiving near Washington, where a community's diversity is on display. Joy Wagner narrates
Video

Video Aung San Suu Kyi: Myanmar Opposition to Keep Pushing for Constitutional Change

Myanmar opposition leader Aung San Suu Kyi says she and her supporters will continue pushing to amend a constitutional clause that bars her from running for president next year. VOA's Than Lwin Htun reports from the capital Naypyitaw in this report narrated by Colin Lovett.
Video

Video Mali Attempts to Shut Down Ebola Transmission Chain

Senegal and Nigeria were able to stop small Ebola outbreaks by closely monitoring those who had contact with the sick person and quickly isolating anyone with symptoms. Mali is now scrambling to do the same. VOA’s Anne Look reports from Mali on what the country is doing to shut down the chain of transmission.
Video

Video Ukraine Marks Anniversary of Deadly 1930s Famine

During a commemoration for millions who died of starvation in Ukraine in the early 1930s, President Petro Poroshenko lashed out at Soviet-era totalitarianism for causing the deaths and accused today’s Russian-backed rebels in the east of using similar tactics. VOA’s Daniel Shearf reports from Kyiv.
Video

Video Hong Kong Protests at a Crossroads

New public opinion polls in Hong Kong indicate declining support for pro-democracy demonstrations after weeks of street protests. VOA’s Bill Ide in Guangzhou and Pros Laput in Hong Kong spoke with protesters and observers about whether demonstrators have been too aggressive in pushing for change.
Video

Video US Immigration Relief Imminent for Mixed-Status Families

Tens of thousands of undocumented immigrants in the Washington, D.C., area may benefit from a controversial presidential order announced this week. It's not a path to citizenship, as some activists hoped. But it will allow more immigrants who arrived as children or who have citizen children, to avoid deportation and work legally. VOA's Victoria Macchi talks with one young man who benefited from an earlier presidential order, and whose parents may now benefit after years of living in fear.
Video

Video New Skateboard Defies Gravity

A futuristic dream only a couple of decades ago, the hoverboard – a skateboard that floats above the ground - has finally been made possible. While still not ready for mass production, it promises to become a cool mode of transport... at least over some surfaces. VOA’s George Putic reports.
Video

Video Falling Gas Prices Impact US Oil Extraction

With the price of oil now less than $80 a barrel, motorists throughout the United States are benefiting from gas prices below $3 a gallon. But as VOA’s Kane Farabaugh reports, the decreasing price of petroleum has a downside for the hydraulic fracturing industry in the United States.

All About America

AppleAndroid