Fiscal Cliff 2013: Congress Needs To Act Before We All Fall Off
On October 12, the U.S. Department of the Treasury announced the final figure for the 2012 fiscal year, which ended on September 30: a whopping $1.1 trillion. This marked the fourth year in a row that the U.S. government’s expenditures have exceeded its revenue by at least $1 trillion. Overall, the trend seems to be a decreasing one, peaking in 2009 ($1.41 trillion) and gently decreasing in 2010 and 2011 ($1.29 trillion and 1.3 trillion respectively). This is still a long way from the 2007 deficit of $161 billion. The sizable change in these figures is explained by a massive increase in expenditures, both through automatic counter-cyclical measures, such as unemployment benefits, and stimulus programs. The slight decline can be explained by a slight decrease in expenditures (1.7%) and an increase in tax revenue (6.4%). As simplistic as they are, these two indicate mild recovery in the economy. If only we could stay on that trajectory.
While the economy appears to be stuttering towards recovery, there remains a number of concerns. Uncertainty shrouds the country’s future: the divisive presidential election, worrisome foreign relations and ballooning debt. With the election in the hands of the voters, and foreign relations waiting to be handled by the future president-elect, the budget clamors for attention.
Ideally, the budget balancing process would be seamlessly choreographed by the set of checks and balances set forth by the United States Constitution. This would result in budget decisions that are deemed fair by all, and representative of the US as a nation. In our imperfect world, however, the looming “fiscal cliff” is the product of our imperfect system.
The term “fiscal cliff” was first used by chairman of the Federal Reserve Ben Bernanke, and it refers to a culmination of events that the Congressional Budget Office predicted would probably pull the country back into a recession. The currently-extended Bush administration tax cuts and Obama- stimulus measures will expire on Dec. 31. On January 2, “sequestration” cuts, severe cuts that significantly reduce spending, will come into effect unless the Obama administration and Congress reach an agreement. These cuts would be massive and wide-reaching if they go through: entitlement programs (except for Social Security) would face 10% budget cuts, domestic programs would endure 8.2% cuts, and some defense programs would lose 9.4% of funding. These proposed cuts would force federal agencies in turn to reduce their budgets, which would translate into 2.14 million job losses, according to a study by Stephen Fuller of George Mason University. Taxes would go up, and disposable income would drop. Both Republicans and Democrats in Congress are waiting for the other side to blink, waiting for leverage, for a better bargaining position. Unfortunately, this imperfect political climate could bring our economy to its knees.
Furthermore, our policymakers’ inaction seems to reinforce the atmosphere of uncertainty. Uncertainty saps households’ and firms’ confidence, potentially slowing consumer spending and capital investment. This can, in turn, undermine the credibility of monetary policies, such as the recently introduced third round of quantitative easing. But for the concessions that bipartisan Congress has managed to make in this time of hardship, parties remain immutable on core budget balancing issues. At a time when the economy is finally showing signs of an upward swing, I join the Federal Reserve, the International Monetary Fund and even Wall Street in exhorting Congress to push through a motion that both parties agree on, so that we do not lose the little progress we have managed to gain.