The Fiscal Cliff—Part 1

The fiscal cliff we approach is a rotting pile of Washington’s unfinished business.  When we slip over that cliff, taxes due will escalate because: the “Bush Tax Cuts” (reauthorized by President Obama) will expire; the temporary payroll tax cuts will expire; and protections from the Alternate Minimum Tax will expire.  As we fall from the cliff: federal unemployment benefit extensions will expire; payments to reimburse physicians for Medicare (“Doc Fix”) will expire; and the “sequesters” will start (spending cuts associated with 2011’s debt ceiling increase deal).  These tax increases and spending cuts will happen automatically unless Congress and the President act constructively.

Besides tax hikes and spending cuts, two difficult items will be up for approval.  Fiscal 2013 appropriations need approval action by October 1 or government will start to shut down.  No budget has passed in 3 years, so  an agreement on 2013’s will not be timely.  Can-kicking will resume to avoid blame for a shut-down in an election year.  Separately, the national debt will hit its authorized ceiling some time near yearend 2012.

If the President and Congress do not block the fiscal cliff’s automatic horrors, we will enter a recession.  The hit to the economy from the fiscal cliff has been estimated at 3.8-4.6% of GDP, or up to $720 billion, with the most damage happening to capital spending, housing, auto sales, and of course, employment.  The rating agencies have threatened to cut U.S. debt ratings if Washington doesn’t fix its debt and budgetary messes.  Higher debt interest costs will result from continuing White House and Congressional intransigence.

The drivers of future deficits and debt remain Medicare, Medicaid, Social Security (somewhat) and the tax code.  To fix the problems underlying the fiscal cliff requires spending cuts across all entitlement benefits and tax increases to staunch debt increases – “just what the Simpson-Bowles Commission, the Rivlin-Domenici task force and the “gang of six” all recommended.”  But this Congress and President seem incapable of constructive work, so to avert a looming recession, Congress and the President will need to take the low road – extend the tax cuts, slow the spending cuts and provide a small increase in the debt ceiling.   

We must pay close attention to which elected officials act constructively rather than those that merely strike a good pose for the cameras.

Alan Daley is a retired businessman living in Colorado and following public policy from the consumer’s perspective.

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