The Fiscal Cliff: will we go over it?

Financial Planning and Fiscal Cliff - Boomfish Wealth Group, LLCThe fiscal cliff is a storm cloud that has been hovering over the heads of financial experts for months. Just 46 days are left until the country goes over what has been named the “fiscal cliff,” a number of tax increases and spending cuts scheduled to go into effect abruptly and simultaneously. Should this happen, the country may fall into another recession due to the sudden loss of $560 billion in spending.

President Obama and Congress are starting talks to cut a deal regarding the budget. The President would like higher taxes for those whose incomes are above $250,000. The Republicans would like to maintain current tax rates and cut the budgets of social programs.

According to the above article, such a recession is avoidable and unnecessary, as the economy has been improving:

“An improving housing market and a blossoming oil and gas market already have economists projecting that the U.S. could add $12 million jobs over four years if policymakers don’t mess things up.”

The article lists several scenarios for how the fiscal cliff could play out:

Scenario 1 involves the government briefly going past the first of the year without a deal, which could cause an economic slowdown and an increase in unemployment up to 10%. If Washington does nothing and the country goes over the cliff, the Congressional Budget Office estimates that the economy would go into another recession (though less severe than the previous one), then would resume weak growth in the second part of the year.

If the payroll tax cut and unemployment benefits expire, the Congressional Budget Office estimates that the economy could lose 800,000 jobs. Automatic spending cuts would cut the defense budget 10%, Medicare 2%, and would reduce other domestic programs, which could cost more jobs.

Scenario 2 involves extending most of the tax cuts implemented under former President Bush and making a “down payment” on spending cuts. Unemployment benefits and the payroll tax cut could expire. A schedule for actions regarding income taxes and spending would be created.

The expiration of payroll taxes and unemployment benefits would raise approximately $155 billion. Spending cuts decided by negotiations could raise up to $500 billion to use as a “down payment” on the country’s debt.

A compromise like this could reduce the country’s growth.

Scenario 3 involves Congress seeking to reduce the debt by $3 trillion over the next decade. While this plan would do much to reduce the debt, it could trigger a deep recession, seen today throughout Europe. To combat the recession, policymakers could have to turn to stimulus spending and tax cuts to boost the economy.

A key part to creating a broad deal would be reducing or eliminating tax deductions and loopholes, such as the tax breaks for oil and gas companies and the wealthy—and even tax breaks for home mortgage interest. Another key part would be the handling of Medicare, Medicaid, and Social Security.

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