The Fiscal Cliff and the Six-Month Plan
By Michael Higham | 08/02/2012 | Budget, Economy, Headline, Legislation | 13 Comments
Credit: wtsp.com
Among the many political buzzwords that conquer headlines, “fiscal cliff” is one of the most prolific this election cycle. The fiscal cliff is a combination of the automatic federal budget cuts and tax hikes that would go into effect if Congress cannot author a deal concerning the matters. This would be set in motion for 2013 and would have serious economic implications for the nation. On Tuesday, Congressional leaders agreed to a six-month federal funding deal that would temporarily hold off long-term budgeting plans.
Senate Majority Leader Harry Reid and House Speaker John Boehner announced the deal, which was also coordinated with the consultation of President Barack Obama. The federal funding level is set to $1.047 trillion beginning in October 2012 through March 2013. While the deal is being drafted, Congress will not vote on it until September because of the August recess.
Republicans are hopeful that a more permanent budget could be crafted after the presidential election. The party hopes that candidate Mitt Romney will be at the head of budgeting plans by that time.
The fiscal cliff sets budgeting plans in the absence of a Congressional plan. Many fiscal policies will expire by the end of the year which make up a portion the consequences. The largest tax hikes would come from the expiration of the Bush tax cuts and the payroll tax cuts. The largest spending cuts would come from defense spending and non-defense discretionary spending. The spending cuts are also known as the budget sequestration. The result would be a 10% overall cut in defense and an 8% in non-defense.
While spending cuts and tax increases sound like a great idea, one must consider the potential economic impact. Some scholars have suggested “falling off the fiscal cliff” and then structuring plans from there. William Gale of the Brookings Institute is one propenent of this idea, saying
“[The fiscal cliff] is likely to hurt the economy in the short-run, but it would put the economy on a better long-term budget plan. It’s a good overall stance for the country,
Going over the cliff would give lawmakers both the opportunity to enact a budget deal because they would have more revenues and less spending already in the baseline and it gives them the incentive to enact a budget deal because they won’t like the structure of taxes and they won’t like the structure of spending.”
The cliff would be tough for the United States to swallow. Unemployment is projected to rise 1.5% if the fiscal cliff is the end result and no plan is set in place before September 30th. A growth reduction of 3.9% in Gross Domestic Product is also projected. Spending cuts result in less funding for jobs and tax increases would hurt economic stimulation.
The plan only sets a funding amount for government. Discussions on extending or expiring the Bush tax cuts and payroll tax cuts will continue even if the plan is approved by Congress. Congress will begin their post-recess session in the middle of September. This six-month budgeting deal and the fiscal cliff will be the centerpiece for debate as the economy is the premier issue in this election cycle.
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13 Comments
Matt Metzner
08.02.2012
@mmetzner
Seems like Congress is dragging their feet until they find out who is running the show in January.
Michael Higham
08.02.2012
@michaelhigham
The problem with going over “the cliff” is that it’ll upset those who will become unemployed because of it. In theory, going over the cliff sounds great but I don’t think the voices of those who get laid off will go unheard. I do agree, in my humble opinion, that it would be rational to let these things go but the government must have a solution for those who get hurt.
Chad Peace
08.02.2012
@Chad_Peace
I would assume that much of the job losses would be from the defense industries loss of federal funding? If that is the case, we have to start diverting resources sometime … we cannot perpetuate the enormous amount of funding forever. So, we have to confront this problem sometime.
Many economists would argue that during an economic downturn, this is a terrible idea. They might be right. But, what if we had a functional government? Maybe we could set in motion a program that trains those with defense jobs that will be put in jeopardy to work in other fields, like alternative energy? or manufacturing?
Michael Snider
08.02.2012
He has a point. High deficits caused by excessive military spending killed Rome. It will kill us too
Nancy Megafro Murph
08.02.2012
gotta hit the skids before we can start working this out, let the cliff come and then let it go… we’ll bounce back quickly prob w/in a few years if our corporations woudl CUT LOOSE w/ some jobs as they sit on the biggest profit pile in their histories. It’s not up to presidents it’s up to these greedy bastards in globocorps and the US Chamber of Comm to actually be Patriotic Enough to hire people to have the confidence in America again, and to take a pay cut at the top so that more talented Americans can get jobs here at home, work JOBS into the budgets. At what point do these pigs at the top start realizing that their short-term gain is long term pain for the rest of the country… and actually CARE about it too…
Pam Mercier
08.02.2012
It’s got to be better than what we’re doing now, which is spending what amounts to Monopoly money. Even it if hurts the economy in the short run, it would give us a stronger base to “start over” with.
Denny Denney
08.02.2012
Unfortunately, we’re are being forced and thus are unable to separate ourselves from this government. So like any parasite, it will suck us dry, smallest and weakest first.
Too many of them have “bought” into the sacrifice of care. Unless we elect the right people, it can’t be corrected. The only way it will be corrected is through liberty, control will only make it worse. And as we all saw in the primaries, they don’t care to the point they will blatantly fix the nomination, because they know most people are too afraid to speak-up, and those that do, they can take down, easily. Look at the men US politics has taken down! How many of us are anywhere close?
William Bosien
08.02.2012
This is more nonsense by shortsighted government puppets willing to swallow and promote foolishness pushed by FED bankers…We need to make the FED eat the losses they are causing, and not worry about THEIR credit rating…We are to be concerned about the American populace (CITIZENS)and the economy they can create with productive effort…There is too much FED debt and government expenditures on personnel…It is now time to fix this mess, not throw inflation debt dollars at it…
Craig D. Schlesinger
08.02.2012
@craigschlesinger
Well said! And don’t forget to lump the TREASURY DEPT in there with the good ole FED. Unfortunately, I think we’re going to get more and more inflationary reactions until it reaches “hyper” status. Then it’s adios dollar!
I’m dismayed at how this somehow became a partisan issue, or that people warning against this fiscal and monetary recklessness are “extreme.” Will it be extreme when the currency collapses? Take off the partisan hats and burn them. We all need to wake up to reality. Nowish.
JC Nighswander
08.02.2012
This just in:
Mitt Romney, presidential canidate, former CEO, and child killer? As the campaign rolls on so have a growing number of accusations coming from Mitt Romneys own home town. “He was the janitor at thier school, the kids used to have the best times playing and singing rhymes with ole Mitt,” says local man Chaz Fromunda. The children would speak fondly of the man they had come to know as “Mr Candypants,” or “big poppa,” which he would love it when they would call him, until the parents noticed the scars. After a heated neighborhood watch meeting they decided to take justice into thier own hands, and they torched his work shack with him in it. After that everything had died back down in this quiet surburban gated coummunity, and Mitts neighbors went back to thier usual routines of burning money, making snuff films and showing them to secret societies, or oppressing black people. And then the election started, and with it the nightmares. It seemed rediculous at first to think that such a monumental failure at life could return from the dead to reap his vengence on those who burned him alive, and the American worker, but for those who see “Mr Candypants” in thier dreams, the nightmare is too real.
I’m Jesus Ceaser Neuhuevos saying sleep tight America.
Stacy Alexander Dill
08.02.2012
Like an alcoholic or drug addict who has to hit disasterous rock-bottom before turning him or herself around?
Janet Lynn
08.02.2012
You better have PROOF Positive before putting stuff like this out. Or are you like Harry Reid.
Gary Frimann
08.02.2012
With a dysfunctional Congess, I think this is truly the only way to get a tax hike on the wealthiest, and return to previous rates pre-2002. Most members of Congress who have signed Norquist’s plan will HAVE to vote for the middle class tax cuts after they have expired on Jan 1.