While addressing the House Financial Services Committee in February of this year, Federal Reserve Chairman Ben Bernanke coined the term “fiscal cliff,” describing, “a massive fiscal cliff of large spending cuts and tax increases” scheduled to occur on January 1, 2013. Bernanke was referring to a series of tax and budget bills passed in the wake of the recession that were intended to ease the financial strain of the recession. These laws are set to expire at the end of this year if Congress does not produce a viable solution.
Should Congress fail to act, allowing the tax cuts to expire and budget cuts to take effect, the results could be drastic, increasing the annual federal tax burden on the average family of four by about $2,200, according to the Congressional Budget Office. The CBO’s May 2012 analysis of the fiscal cliff assesses the potential impacts of proposed spending cuts, finding that that the implementation of scheduled cuts could easily push the struggling U.S. economy back into a recession during the first half of 2013.
Despite the severity of these consequences, discussion of the fiscal cliff has been relatively absent from political speeches, debates, and ads leading up to the November elections. In last Wednesday’s presidential debate on domestic issues, neither the moderator nor the candidates directly referred to the subject. The candidates have a clear motive for eschewing discussion of the fiscal cliff or a viable solution to the problem; any such discussion involves making tough policy choices. Draconian spending cuts and tax increases have historically not helped to win presidential campaigns. Debate moderator Jim Lehrer’s failure to include a direct question on the subject is more vexing. Last week's debate touched on issues tangential to the fiscal cliff such as the Simpson-Bowles commission, but Lehrer did not press either candidate directly on the matter of this fiscal calamity.
The major components of the fiscal cliff are the expiration of the Bush Tax Cuts, federal unemployment benefits, and social security payroll tax cuts, on top of automatically triggered spending cuts associated with the Budget Control Act of 2011. The Budget Control Act resolved the August 2011 debt-ceiling crisis by setting up a sequestration process that would automatically trigger cuts to both military and domestic spending. The cuts would not have been triggered had the bi-partisan Joint Select Committee, or “Supercommittee,” come to an agreement by the end of November 2011 on how to reduce the deficit by $1.2 trillion in two years.
Cuts associated with the Budget Control Act could result in the loss of 277,000 federal jobs, according to a report from the George Mason University Center for Regional Analysis. The report assesses the impact the Budget Control Act would have on all agencies subject to cutbacks including Agriculture, Commerce, Education, EPA, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, State, NASA, Transportation and Interior. While the cuts would only reduce federal spending from 22.9% of GDP to 22.4% of GDP, according to the CBO, they would cause significant job losses for federal health inspectors, Federal Aviation Administration workers, and FBI agents.
The fiscal cliff is slowly creeping towards the top of the policy agenda and will continue to do so as time runs out over the coming months and Congress is force to act. Two key questions remain in the story of the fiscal precipice of 2012. Will the candidates successfully avoid offering a solution to the problem until after the elections, giving lawmakers under two months to hammer out a proposal? And when legislation does address the problem, will it simply kick the can down the road with a short-term extension of the status quo or will it tackle the structural fiscal problems associated with the deficit?