What is the Fiscal Cliff?

What is this “Fiscal Cliff” you keep hearing about on the news?

It is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the start of 2013. The Bush tax cuts are set to expire for millions of Americans, and billions of dollars of spending cuts will take effect because Congress couldn’t reach a deal last year to reduce the deficit by at least $1.2 trillion over 10 years.

Democrats want a combination of spending cuts and tax increases on the high income earners, while Republicans want to cut spending, but don’t want to raise taxes. Both want to avoid the fiscal cliff because of the huge impact on our economy.

What are the immediate threats to the economy?

The sudden rise in taxes and cuts in spending would have a harsh impact. According to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the expiration of the Bush tax cuts, and $125 million from the expiration of the Obama payroll-tax holiday. Also, $40 million from the expiration of emergency unemployment benefits, and $98 billion from Budget Control Act spending cuts.

How would this impact growth?

The nonpartisan Congressional Budget Office projects that if the tax increases and spending cuts go into effect, the economy would contract at a 2.9% annualized rate in the first six months of 2013 and the unemployment rate would rise to 9.1% at the end of next year. If the spending cuts and tax increases are avoided, the economy would grow at an anemic 1.7% next year and unemployment would fall slightly to 8.0% by the end of next year.

My Thoughts

We've got to stop kicking the can down the road!!! Our economy needs certainty, and we must demand that the government make the decision that is best for our economy, not the one that holds the most political gain. Our economy is a disaster and it's time to "pay the piper". Even if that means we all have to chip in.

Learn more about my unique view on Financial Planning at www.jasonwqualls.com