The Looming Fiscal Cliff: how bad is it?

It sounds like something from a prepping novel. Sequestration: automatic deep federal spending cuts scheduled to take effect January 2nd of 2013, unless Congress passes new legislation to prevent it. The members of Congress and various financial experts are in eerie agreement that these automatic cuts will be bad for the economy and the nation. Taxes will increase, federal spending will decrease. The Congressional Budget Office expects unemployment to rise and gross domestic product to fall (CBO).

When will Congress pass the bill needed to prevent this financial disaster? They have 7 weeks to pass the bill, and it hasn’t even been written yet. In fact, Democrats and Republicans have not reached an agreement on what the bill should contain. Without bipartisan agreement, the bill cannot pass the Republican controlled House and the Democratic controlled Senate.

How did we get into this situation? Ever since Bill Clinton left office, the federal government has been overspending by hundreds of billions of dollars. During the administrations of President George Bush and President Barack Obama, the national debt has increased by over 10 trillion dollars. Each of these two Presidents, with the associated sessions of Congress, has added about $5 trillion to the national debt. Everyone realizes that this situation cannot continue.

So Congress passed a law in 2011 authorizing a super committee to decide how to cut spending to reduce the budget shortfall and the national debt:

The Budget Control Act of 2011 (BCA) established a 12 member Joint Select Committee on Deficit Reduction (or “super committee”) charged with reducing the deficit by an additional $1.2 – $1.5 trillion over ten years. The BCA also included a sequestration hammer should the super committee fail, a provision intended to “force” the super committee to act.
So, as established in the BCA, sequestration was triggered when the super committee failed to reach an agreement. Sequestration generates automatic cuts for each of nine years, FY 13-21, totaling $1.2 trillion. Without Congressional action to prevent sequestration, the first round of cuts will take place Jan. 2, 2013. The 2013 cuts apply to “discretionary” spending and are divided between reductions to defense ($500 billion) and non-defense ($700 billion). (Idea Money

Certain federal programs are exempt from cuts, listed here, including social security and food stamps. The cuts are not $1.2 trillion dollars in one year. Over time, the reduced interest on the national debt from the cuts should drop that figure to about $984 billion. And that total is then divided into successive cuts in 9 consecutive years: 2013 to 2021 inclusive. The cuts work out to about 109 billion dollars per year (detailed analysis here).

However, each year’s cuts continue indefinitely. The cuts on 2 January 2013 remain in place as more cuts are added on 2 January 2014. In each successive year, new cuts are added to the cumulative cuts of past years. So if the 2013 cuts harm the economy, each successive year’s cuts could make it still worse.

In addition to spending cuts, the Bush era tax breaks are scheduled to expire in January of 2013 also. This compounds the problem, especially in the year 2013.

Mark Zandi, chief economist at Moody’s Analytics, said, “If you tote up all of the things that will happen on January 1st — all the tax increases, all the spending cuts, everything — it actually totes up to $728 billion in calendar year 2013.”

The numbers are staggering. According to the Congressional Budget Office, the average American family will pay between $2,000 and $3,000 in additional taxes, 1,200 government programs will see cuts, and unemployment is expected to climb back above nine percent.

Zandi said, “It’s very, very likely that we suffer a very deep recession, and I don’t think that’s the way we want to go here.” (CBS News

What happens if Congress does not pass new legislation on the budget? There could be an economic disaster in the U.S., with repercussions for the world economy. Food prices will rise in 2013, due to the 2012 drought. But economic problems on top of that could cause food prices to skyrocket. The Congressional Budget Office predicts a rise in unemployment in 2013 to 9.1% (CBO). But many commentators think it could be much worse. We could be looking at snowballing economic problems that bring the economy into a very deep recession, with high unemployment, high inflation, and no quick recovery. It’s an economic SHTF scenario.

– Thoreau

3 Responses to The Looming Fiscal Cliff: how bad is it?

  1. Did it ever occur to anyone that these measures are those actions needed to keep this country from becoming Greece? No political will here to do what really needs to be done. Take the bitter pill, and pay that piper….

  2. We are in serious trouble. Massive tax increases and deep spending cuts is austerity. We have seen how austerity has worked in Southern Europe. “Deep recession” may be quite the understatement.

  3. i’ not a fan of either party. But we must raise taxes back to the Clinton era rates and cut the heck out of:

    medicare and medicaid.

    Oh! guess wht? thats exactly what the fiscal cliff will do.

    Bring it on :)