The Basics of “The Fiscal Cliff”

It’s safe to say that by this point, we’re all aware of the fiscal cliff and its status as the elephant in the room.  Everyone knows that some sort of decision has to be made by the first of the year and that it affects every taxpayer.  As for the specifics, however, a sizable chunk of the population only has a vague idea, and often the media outlets reporting on the decision-making progress don’t go into detail.

The fiscal cliff’s roots go back to changes made in the early 2000s, during which time tax cuts were implemented across a variety of areas.  Back in 2011, in an effort not to stifle economic growth, the cuts were extended until January 1, 2013.  The United States’ current economic and fiscal climate, however, is making for an extremely difficult situation: growth is still feeble enough that levying the originally planned taxes would likely do serious damage, but further extending the cuts would exacerbate the already massive deficit.

Needless to say, both the economy and the deficit are politically charged issues, which is why Congress is cutting it so close to that January 1st deadline.  Partisanship and negotiations aside, the options boil down to going ahead with the policy as it’s currently laid out, cancelling the scheduled tax increases and spending cuts, or compromising in such a way that doesn’t address the budget issue as comprehensively but that would negatively impact growth less.  It’s a very delicate balance complicated by a colossal number of variables, which is why Congress has been putting off the decision for about three years.

If the tax increases and spending cuts go into effect as originally planned, analysts predict that GDP would decline by 4%, officially landing the U.S. back into a recession, and that unemployment would increase by nearly 1%.  Consumption spending, which is particularly important when it comes to sustaining growth, would likely take a hit of around $1 trillion.  On the other hand, the deficit as a percentage of GDP would be reduced by half, which, given the budget trends, would be a welcome change indeed.

If you have any questions about the fiscal cliff and how it may impact your home loan situation, please don’t hesitate to contact Tammy.

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