The Media has been consumed with the ubiquitous debate over our nation’s looming fiscal cliff and the questions associated with it. What will happen on Jan. 1, 2013 if Washington cannot get a deal done?
The Fiscal Cliff primarily refers to the series of tax hikes and spending cuts that will automatically go into effect at the year’s end, barring any governmental intervention.
In the 2010 budget negotiations there was an effort to arrive at a budget deficit agreement. Congress passed legislation that will drastically cut spending in areas like defense and entitlement, and will also would allow for the expiration of the Bush Tax Cuts, which would increase the tax rate for investments, and will limit the extension of various tax credits, such as the Child Tax Credit.
The general idea then was that if highly-valued programs for both political parties were threatened, then both sides would have more incentive to come to an agreement in the future.
It was an interesting idea, but here we are in 2012, and both parties remain uncooperative, while we edge even closer to the coined “fiscal cliff.”
The “cliff” analogy, however, may be overdramatic and incorrect. Analysts disagree how quickly the changes would affect the economy. It could be a drastic market shock, thus substantiating the “cliff” terminology, or it may be more like a slope, which would make a gradual impact. Either way, if all of the spending cuts and tax increases do automatically go into effect next year, it will not be a positive result.
On the bright side, in the event that Congress does nothing, and America goes tumbling over the cliff, the budget deficit has been cut in half immediately.
The obvious downside is that dramatic spending cuts coupled with simultaneous tax increases will likely lead America into another recession, according to estimates from the Congressional Budget Office.
Obviously, neither side wants to see that happen, Congress needs to find a compromise.
They can do what they can to prevent some of the tax increases and spending cuts to go into effect, which is not exactly an ideal compromise or a viable long-term option, since it does not address the budget deficit. However, it would prevent the danger in the immediate short them.
Ideally, Congress will reach that middle ground with a hybrid plan containing compromise with tax increases and spending cuts.
Granted, it is not an attractive scenario. Cutting too much spending results in recession, while cutting too little could downgrade U.S.’s credit rating. There is little doubt that Congress needs to reach a middle ground.
There is going to be disagreement and resistance from both parties, but in a harsh political and economic environment, you compromise or you fail.