Understand​ing the Fiscal Cliff

We all hear about the fiscal cliff, but do we really understand what it means to our economy? It is a difficult concept to understand; even our government has a hard time interpreting it. This is the “fiscal cliff” in a nutshell.

In August of 2011, the Budget Control Act was signed into law. This law allowed for three things. It allowed President Obama to immediately increase the debt ceiling, it created the Congressional Joint Select Committee on Deficit Reduction and it forced Congress to vote and agree on a balanced budget amendment. On December 31, 2012 all tax cuts enacted since 2001 expired and there was to be a major reduction in government spending.

With all this pressure, Congress was trying to come up with an improved balanced budget, which would help reduce our country’s budget deficit and debt. If Congress did not make an agreement by the New Year, the “fiscal cliff,” which would have been the outcome of the Budget Control Act of 2011, would take effect. If this law were to take effect, on Jan. 1, 2013, the United States would have experienced a dramatic change in the economy.  Our government would have had to cut funding to many programs and businesses, meaning the loss of many jobs.

To avoid the fiscal cliff, U.S. lawmakers needed to come up with a budget plan that would avoid a major economic hit.  If they combined tax cuts and reduced spending, there was a possibility of our country going bankrupt. Coming up with a plan was difficult for both parties because they have very different economic ideologies, resulting in very different approaches to solving this problem. Republicans want to cut spending to avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases.

Fortunately, the House of Representatives signed off on a deal to avoid the fiscal cliff, thus averting a potential mess. Basically, we dodged a huge economic bullet.