United States fiscal cliff

The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely caused a mild recession with higher unemployment in 2013, followed by strengthening in the labor market with increased economic growth.

ATRA eliminated much of the fiscal cliff's tax side while the reduction in spending caused by budget sequestration was delayed for two months.

[10] In late February 2012, Ben Bernanke, chairman of the U.S. Federal Reserve, popularized the term "fiscal cliff" for the upcoming reduction in the deficit.

[13] Before the House Financial Services Committee he described that "a massive fiscal cliff of large spending cuts and tax increases" would take place on January 1, 2013.

As of January 2013[update], Congress was unable to reach agreement on spending cuts and the sequestration was delayed until March 2013 as part of the American Taxpayer Relief Act of 2012.

"[28] Alan Houseman of the Center for Law and Social Policy has also argued that significant cuts to programs included under non-defense discretionary spending would harm low-income families deeply.

[34][35][36] Defense Secretary Leon Panetta compared this reduction in spending to a burn rate, as faith ebbed in the ability of Congress to resolve the issue.

[39] And the USAF has moved to shut down the Tethered Aerostat Radar System which has proved vital in the fight against the Illegal drug trade.

[40] The looming cuts have already impacted national security strategy with the February 6, 2013 cancellation of the Harry S. Truman deployment, which marked an end to the policy of keeping two carriers in the Persian Gulf region.

[44] Hale testified the next month and told the Congress that it was their actions that were preventing the Pentagon from making sensible budget reductions and therefore forcing furloughs of defense civilian employees.

[45] On 26 March 2013, Obama signed a continuing resolution that would allow for reprogramming requests to shift $10 billion in funds under the sequestration limit,[46][47] however civilian furloughs across all Pentagon budget areas will be required to meet wartime costs.

If they acted to extend current policies, keeping lower tax rates in place and postponing or preventing the spending cuts, the next decade would more closely resemble the alternative fiscal scenario.

In other words, roughly 70% of debt increases projected over the next ten years could have been avoided by "going over the cliff" and allowing the expiration of tax cuts and required sequestration expected at the end of 2012.

On the other hand, if Congress acts to extend current policies (the alternative scenario), deficits and debt will rise rapidly over the next decade and beyond, slowing the economy over the long run and dramatically increasing interest costs.

The CBO also estimated that the total reductions to the fiscal year 2013 deficit by letting current laws take effect (which increase taxes and reduce spending) would be about $560 billion.

CBO explained why spending cuts have a more significant adverse impact on the economy than tax increases per dollar of deficit reduction: "The larger 'bang for the buck' next year of the spending policies under the alternative fiscal scenario occurs because, CBO expects, a significant part of the decrease in taxes (relative to those under current law) would be saved rather than spent.

[64] The CBO's January 1, 2013 analysis of the American Taxpayer Relief Act of 2012 (ATRA) included adjustments to the Baseline scenario for 2013 of -$280B in revenues and +$50B in spending.

Further, it included raising the Medicare eligibility age from 65 to 67 and slowing increases in Social Security costs by reducing cost-of-living adjustments.

Congressional rules allow bills to skip committee hearings, but the group lacks the clout to "push its plan through Congress outside the regular order of business.

[83] The Congressional Budget Office (CBO) estimated in August 2012 that if the patch were not implemented, federal revenues would rise by a total of $864 billion over the 2013–2022 period.

[13][85] However, when commenting on the upcoming fiscal cliff, Federal Reserve officials "agree that the impact of the bank's stimulus campaign will be trivial in comparison to the consequences, and the economy will most likely return to recession.

"[85] The US debt ceiling became involved in the fiscal cliff debate when Treasury Secretary Timothy Geithner introduced the President's authority to raise the country's borrowing limit as a part of his first formal proposal.

Therefore, a number of measures would be put into place to delay this from happening, starting with suspending issuance of State and Local bonds on December 28 and investing in two government pension plans.

These and other measures would normally delay reaching the debt ceiling for about two months but, because of debate over the fiscal cliff, this might be extended if there is no change in the current laws.

[92][93] Federal Reserve Chair Ben Bernanke emphasized the importance of balancing long-term deficit reduction with actions that would not slow the economy in the short-run.

[90] Other experts at the Center on Budget and Policy Priorities and the Carlyle Group have argued that allowing the tax increases and spending cuts to occur under current law may be necessary to create the "grand bargain" required to get the U.S. deficit and debt trajectory under control for the long-run.

In other words, allowing current law to take effect would create conditions under which legislators might be forced to enact better designed deficit reduction approaches of similar or greater magnitude.

Patrick Knudsen, a Heritage Foundation fellow, argued that lawmakers should seek long-term stability by rejecting short-term fixes and "grand bargains.

While ATRA would reduce short-term economic impact due to the cliff, it would slow long-term growth relative to the lower deficit Baseline scenario.

The move was seen as an attempt to delay a showdown on the debt limit given their experience with the 2011 debt-ceiling crisis, as well as the recent Democratic gains in the 2012 elections.

Budget deficits, projected through 2022. The "CBO Baseline" (in red) shows the expected effects of the fiscal cliff under then-current law, i.e., if Congress took no action in 2012. The "Alternative Scenario" (in blue) represents what was expected to happen if Congress were to extend the Bush tax cuts and repeal the Budget Control Act -mandated spending reductions.
U.S. Federal budget deficit as % of GDP assuming continuation of certain policies for 2012–2022. The baseline deficit indicates the scenario with the fiscal cliff, meaning tax cuts expiring and spending cuts applied. Avoiding the "fiscal cliff" increased the projected deficit.
Three CBO deficit scenarios related to the American Taxpayer Relief Act of 2012 (ATRA) and the Fiscal Cliff. The blue line (August 2012 baseline) at bottom was the "current law" baseline, with tax increases and spending cuts that would take effect if laws were not changed. The grey line (March 2012 alternative baseline) was the "current policy" baseline, which represented the avoidance of the tax increases and spending cuts. The orange line (February 2013 baseline) was the post-ATRA result. [ 53 ]
U.S. federal debt from 1940 to 2022. The right side of the diagram projects what would happen to the debt if Congress (a) allowed the "cliff" laws to take effect and reduce the deficit (the baseline) or (b) extended the existing policies , such as keeping tax cuts in place (the alternative).
Overall effects of the fiscal cliff.
Democratic and Republican leaders meet in late November as part of the fiscal cliff debate.