In the United States, the
"fiscal cliff" refers to the economic effects that will result from
tax increases, spending cuts, and a corresponding reduction in the US budget deficit, potentially beginning in 2013.
The deficit—the difference between what the government takes in and what it
spends—is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that
this sharp decreases in the deficit (the fiscal cliff) will likely lead to a
mild recession
in early 2013 with the unemployment rate rising to roughly 9 percent in the second
half of the year.
The laws leading to the fiscal
cliff include the expiration of the 2010 Tax
Relief Act and planned spending cuts under the Budget Control Act of 2011. Nearly all
proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts
or changing the 2011 Budget Control Act or both, thus making the deficit larger
by reducing taxes or increasing spending. Because of the short-term adverse
impact on the economy, the fiscal cliff has stirred intense commentary both
inside and outside of Congress.
The Budget Control Act was a
compromise intended to resolve a dispute concerning the public debt
ceiling. Some major programs, like Social Security, Medicaid,
federal pay (including military pay and pensions), and veterans' benefits, are
exempted from the spending cuts. Spending for defense, federal
agencies and cabinet departments will
be reduced through broad, shallow cuts referred to as budget sequestration.
