The Fiscal Cliff Isn’t a Cliff
Ignore the talk of a “fiscal cliff.” It’s not true.
That phrase—fiscal cliff—suggests that the fiscal status of the government will go off a cliff, debt increasing dramatically, which would be bad. What’s actually going on is a combination of revenue increases and spending cuts kicking in January 1st that would improve the fiscal situation by lowering debt.
But it would withdraw money from the economy at a time when many people believe that money is needed for economic recovery.
We’re really talking about a sharp, but insufficient, improvement in the fiscal situation, not a “fiscal cliff.” But don’t hold your breath waiting for any politicians to start fretting about the coming “sharp, but insufficient improvement in the fiscal situation”…
Here’s what’s actually going on.
First, there’s the expiration of tax cuts. They’ve been called the “Bush tax cuts,” but President Obama signed the most recent extension of them. The expiration of these temporary tax cuts would increase income taxes (and government revenues) by about $221 billion.
Then there’s “sequestration.” That’s automatic spending cuts of about $65 billion that kick in because Congress did not come up with its own deficit control deal as it planned to do when it passed the Budget Control Act of 2011. No deal means that automatic spending control goes into effect. But everyone’s worried that “sequestration”—reduction in government spending—will undercut the wobbly economic growth that everyone talks about happening. (Is it?)
A couple more policies from another law, the Middle Class Tax Relief and Job Creation Act of 2012, change with the new year. One is the temporary, 2% reduction in the payroll tax—about $95 billion in revenues would result from its expiration. Spending on unemployment benefits would stop, producing a $26 billion improvement in the fiscal situation.
The Alternative Minimum Tax would return to 2000 tax-year thresholds, increasing revenue and improving the fiscal situation. Some 26 million households might become subject to the AMT which could raise taxes by as much as $3,700 for some people.
There are other policies triggered by the coming turn of the year—new health care taxes and the expiration of an increase in Medicare payments, for example. They all point in the same direction: lowering U.S. debt.
But they’re calling it a “fiscal cliff.” It’s a phrase Federal Reserve Chairman Ben Bernanke used in congressional testimony back in February. Now his dramatization of tax increases and spending reduction that would put the government into better fiscal order has taken on a life of its own.
When Congress comes up with a deal later this year to address the “fiscal cliff,” it probably won’t actually improve the fiscal situation. It will make the fiscal situation worse, giving higher priority to maintaining high spending and low taxes due to the belief that this does more good for the economy than maintaining high levels of debt does harm.
Watch this space as events unfold…