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What is the fiscal cliff?

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What is the fiscal cliff?


The phrase ‘fiscal cliff’ – coined by the head of the US central bank Ben Bernanke – refers to the shock measures that were intended to focus partisan politicians’ minds and get them to compromise and agree spending cuts and tax increases.

If they didn’t, automatic and much tougher deficit reductions would come into force at the start of the new year.

Without those automatic spending cuts and tax rises, the 2013 US budget deficit – the shortfall between what the government spends and what it raises- would be just over one trillion dollars – four times what it was before the crisis.

The fiscal cliff measures reduce the deficit to 600 billion.

The 430 billion dollar difference includes 300 billion in federal tax hikes, mostly income tax; lower earners would see it jump from 10 percent to 15 percent, the richest would pay 39 percent instead of 35 percent.

Nine out of ten Americans are affected by these increases.

The average American family would see their tax bill rise by up to 3,500 dollars per year. And that’s not all.

Government spending cuts account for another 100 billion dollars, half of that from the defence budget.

The rest comes mainly from social programmes, particularly affecting poorer Americans. They include health insurance for the elderly and disabled.

Benefits to over two million long-term unemployed would also end, along with assistance to those living in low-income housing.

The deficit would certainly be reduced, but with a hugely negative impact on the economy, trimming an estimated four percent off gross domestic product, pushing the US back into recession and causing unemployment to rise to nine percent of the workforce.

That would be a massive shock to the US economy, and experts say it would sink into recession in the early months of 2013, with the effects rippling out through the global economy as well.

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