July 22, 2014

Dewonkify – Fiscal Cliff

The Word: Fiscal Cliff

Definition: “Fiscal cliff” is the term used to describe the situation that the U.S. will face at the end of this year, when provisions of the Budget Control Act of 2011 are scheduled to go into effect. (Some use the word “austerity cliff”.) If no action is taken by Congress and the President, $500 billion of spending cuts and tax increases will automatically occur. For more on the specifics of the Fiscal Cliff, read our blog post.

Used in a Sentence: “[Congressional Budget Office]: ‘Fiscal Cliff’ Could Trigger Recession”

History: In 2011, legislators reached a bipartisan agreement to raise the debt ceiling. However, in exchange for raising the debt ceiling, the agreement mandated that Congress put forward a plan to balance the budget – by December 31, 2012- or automatic spending cuts of 10% across the board would go into effect. These automatic cuts are also known as “sequestration.”

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended the Bush tax cuts for two years, is set to expire on December 31, 2012. If Congress fails to take action, taxes will increase starting on January 1, 2013.

What it Means: Both sides of the aisle worry that the fiscal cliff could plunge the U.S. back into a deep recession. The bipartisan Tax Policy Center estimates that if no deal is struck by January 1, 90 percent of Americans would face tax increases, at an average of $3,500 in additional taxes by April 2013.*

Congress has not yet come up with a plan to balance the budget, so the combination of tax increases and spending cuts known as the “fiscal cliff” continues to loom. Neither party wants to see the U.S. go off the cliff, but serious negotiations will have to occur in order to stop this from occurring.

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