What is the so-called Fiscal Cliff?

Issues: Sequester


The federal budget is approaching what has been commonly called a “fiscal cliff” at the end of the year.  It is when a number of tax cuts and temporary assistance measures expire, deep spending cuts are triggered across government services and even deeper cuts are scheduled in Medicare doctor payments, all near the time when the nation will reach its debt limit.  The non-partisan Congressional Budget Office (CBO) and others have forecast that the economic effects of a net $503 billion increase in revenues and decrease in outlays in fiscal year (FY) 2013 could trigger another recession next year.

Federal Reserve Chairman Ben Bernanke and two bipartisan fiscal commissions have warned to take pains not to disrupt economic growth in the short term while pursuing a necessary longer-term deficit reduction package.  Therefore, any successful proposal will need to create jobs in the short term while also addressing the need for deficit reduction in the long term.  President Obama laid out a plan in his American Jobs Act, which was released more than a year ago, but the House of Representatives failed to even schedule a vote on many of the components that would directly create jobs.  For instance, that package provides a payroll tax credit for employers who hire new workers, and includes billions of dollars for school modernization, infrastructure investment, and hiring and retaining teachers and first responders in our communities.  Enacting these types of job-creation proposals would strengthen the economy while we also pursue long-term deficit reduction.

Last week, CBO released a report estimating the budgetary and economic impacts associated with preventing different parts of the scheduled spending cuts and tax increases.   The following analysis from the House Budget Committee Democratic staff describes the looming budgetary changes, briefly summarizes their effects, and describes some of the alternatives proposed by Democrats and Republicans.