What is the Fiscal Cliff and Why Should You Care?

 

What is the Fiscal Cliff and Why Should You Care?Welcome to Club Thrifty’s Halloween Spooktacular Extravaganza! Today’s topic is entitled, “What is the Fiscal Cliff and Why Should You Care?” Please be sure to put the kiddos to bed, lock your doors, and slip on a pair of depends because you’re sure to pee your pants from fright! Enjoy! Muhahahahahahahaha!”

 

There has been quite a lot of talk lately in both political cirlces and in the personal finance community about the “fiscal cliff.” Yet, many still wonder what the fiscal cliff is all about. Never fear! Just like Clarissa of Nickelodeon shows past, Club Thrifty is here to explain it all to you!

 

(Start playing this song and continue reading!)

 

What is the Fiscal Cliff?

What Is the Fiscal Cliff and Why Should You Care?

 

The fiscal cliff is not to be confused with the growing national debt here in the United States. They are two separate things. In fact, the fiscal cliff is a prediction about the expected budget deficit reductions in beginning on January 01, 2013. It also predicts the effect that those will reductions will have on the national economy. Reducing the deficit doens’t sound so scary right? We need to get our spending under control, so why give it such a frightening name?

Do you remember when we had those contentious debates about whether or not to raise the “debt ceiling” back in the summer of 2011? Maybe you remember hearing about a “Super Committee?” Essentially, congress failed to reach a real agreement about which programs and taxes should be cut in order to raise the debt ceiling. Instead, they passed the Budget Control Act of 2011 and raised the debt ceiling anyway, passing the buck onto the Super Committee. The Super Committee was given about 2 months and charged with eliminating $1.2 trillion from the federal budget over the next 10 years. While the creation of this super committee was highly unusual and probably illegal, the idea was to avoid partisan debate and gridlock so that the government could continue to function and not default on it’s loans. Of course, the Super Committee failed.

 

Where Does That Leave Us?

In the event that the Super Committee failed to come to an agreement, congress provided a provision in the Budget Control Act of 2011 that required program cuts and tax hikes across the board. Of course, nobody wanted to actually have to be held accountable for these provisions. Thus, these tax hikes and program cuts are set to begin on January 01, 2013 – about 2 months from now.

 

What’s the Big Deal and Why Does It Matter to Me?

So, what sort of changes are we actually talking about here? Will you even notice a difference in your daily life? The fact is, you might.

In brief, much of the spending and several of the tax cuts that have been passed over the last decade will now expire. The Bush-era tax cuts will expire, and be returned to pre-Bush levels. The 2% Social Security payroll tax cut will also expire. So, yes, you are going to see a difference in your take home paycheck.

In addition, most discretionary spending will be cut across-the-board. The costs of Medicare are also expected to rise as the measures put in place to delay increasing reimbursement rates are also set to expire.

 

Have I Scared You Yet?

For personal finance wonks, this should seem like a good thing, right? After all, we are always telling you that you need to stick to a budget right? The fact is that you can’t spend more than you make and expect not to be broke, right?

On a personal level, this is absolutely true. I would advise you to make all of your spending changes immediately. However, when it comes to large scale cutting and spending like this, doing everything all at once can be a very dangerous thing to an economy as a whole. While the Congressional Budget Office expects federal revenues to increase nearly 3% and spending to decrease by .5%, the CBO also warns that we may face rising unemployment and a second recession in 2013. Nevermind Freddy and Jason! A second recession could be some serious scary! Of course, declaring national bankruptcy could be even worse.

 

So, what do we do? If we “avoid” the fiscal cliff, economic conditions will be similar to 2012 but our national debt will continue to explode. If we fall off the cliff, our deficit is predicted to decrease but economic conditions could worsen. It is quite the conundrum, isn’t it?

The fact is that between now and January 1, the lame duck congress and a possible lame duck president aren’t going to be able to do much. Some experts warn us that falling off the fiscal cliff could be disastrous to the economy. Others believe that if such difficult conditions arise, it may force legislators to make a better deal. What do you think? Let us know in the comments below!

…Oh, and have a Happy Halloween! Muhahahahahahaha!

About Greg

Greg Johnson is a proud husband, father, and debt crusader who believes in living life now while saving for the future. He is the co-founder of the personal finance website Club Thrifty, where he brings the awesome sauce each and every day.

Comments

  1. “So, what do we do? If we “avoid” the fiscal cliff, economic conditions will be similar to 2012 but our national debt will continue to explode. If we fall off the cliff, our deficit is predicted to decrease but economic conditions could worsen.”

    In all honesty, I think our national debt will continue to explode no matter what the tax rate is at.

    • That is probably true considering the way the system is set up, particularly with the Fed.

    • And where is the problem? Is inflation out of control? No? What do we expect with a growing economy, the money supply must also grow. What is the money supply, other than the “national debt?” (More accurately Federal Deficits = Net Private Savings + Net Imports). The balanced budget hand-wringing is all from people that have absolutely no clue about how the modern monetary system works.

  2. I don’t necessarily think that having these tax cuts expire would be the equivalent of falling off a cliff.. Yes, the economy is not even close to all the way back, but it was thriving under those tax rates in the 1990’s..

    It will take a combination of incremental taxes and some major spending cuts to dig this country out of its current hole.. Just like with a personal budget, when times get tough, you hustle for more income and find places in your budget to scale back..

    • Personally, I agree with that stance as does the Peter G. Peterson Foundation. You need to increase revenue and cut spending. Unfortunately, you also need people with the political will to do both – which doesn’t play well with their constituents.

  3. I think falling off the cliff would help us in the long term but hurt us in the short term.

  4. It’s important they get it solved, but I also think the media hasn’t helped out any. Everyone will feel it in someway, but it’s not the end of the world that everyone is making it out to be.

  5. What Sean and Jefferson said…. ;-)

    I’ve always taken more of a Ron Paul/Ross Perot stance: let’s get it right. I still find it funny that Congress passed a law with provisions that they don’t want to follow….so they sidestep. It’s also the reason why this election is short on details: everyone’s afraid they won’t get elected if they tell you what they really want to do to lower the deficit.

  6. There are way too many entitlements and huge budgets, like defense, that would need to be cut and I’m afraid the outcry would be too much for pass the buck politicians. Everyone wants something cut unless it is your piece of the pie that gets smaller. If the government would just read some PF blogs to learn how to do it, we’d be set! In all seriousness, it is very scary. As a country, we’ve set off on the Titanic, and will have to hit the iceberg at some point.

  7. Taxes are going to eventually have to go up and all Americans are eventually going to have to succumb to the reality that we have to pay more in taxes. More debt = more taxes. Where they come is the unknown, but we just need to make the best of it and continue living our lives the best we can.

  8. John at Frugal Rules wrote about the fiscal cliff and gave a really good explanation of what it is. PF bloggers minds must be linked since we all tend to talk about similar issues sooner or later :)

    Don’t worry, if we don’t avoid the impending disaster we’ll just end up like Greece, broke. Chinese will run this country as currently most of the debt is held by them. We’ll rename our country to the “United Colonies of Chinese Republic.”

    Don’t you just hate how they push off the tough decisions until AFTER the election. God… just thinking about that makes me want to explode. Ugh, I better go drink some more coffee and chill.

  9. I’m with others, taxes will have to go up, as much as that sucks. It’s tough, because it’s like bailing your friend out who makes stupid decisions with their money. I fear it may only be enabling them, but hopefully a tax increase can go hand-in-hand with a spending decrease without too much economic impact so we can kill this debt.

    But I hate politics and such, so I’m going to stop now :)

  10. It really is a tough situation. Washington continues to become more and more polarized, making any sort of compromise on taxes and spending impossible. Both parties are equally to blame.

    I agree it will take both spending cuts and tax increases to reach a balanced budget, in addition to overall economic growth to broaden the tax base.

    Regarding the fiscal cliff, I think the newly elected congress will pass something early next year and make it retroactive to January 1. But until then all the uncertainty will drive businesses not to hire as many people or expand their operations, which will maintain the painfully slow recovery we’re experiencing.

    • That is probably true. The business where I work is holding off on a few big decisions until they can figure out what will happen with their taxes after the new year.

  11. The national debt is a scary thing. It’s much smaller here in Canada, but when you convert it to per capita, or a % of our GDP and we aren’t far behind you guys. Deal with the cuts now, or ease the pain today but know there is bigger pain coming tomorrow. This may come down to do you rip the bandaid off, or just a little at a time?

    • I agree. We can make it fast and painful or slow and painful…but either way it will be painful! Sometimes I just want to bury my head in the sand.

  12. Love the song… you should have asked people to play it and start reading… it really creates the right mood :D

  13. I really don’t see the big deal with the 2% tax hike. And, I don’t think anything will be so bad b/c CONgress will do our bidding if they want to stay in power.

    • Honestly, I think the 2% tax hike is necessary. If we go into recession again, so be it. We are going to have to start feeling the pain sooner or later, so it may as well start now.

  14. Like everyone else, I think a tax hike is necessary and inevitable. Better to start now and work at it slowly rather than ending up cornered one day down the line and having to make some really REALLY tough choices.

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