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Question:


What is the “fiscal cliff”?
-FinanceNerd


Answer:


That is a fanciful name for the sudden slowdown in economic growth that is forecast by some to occur around the end of the year unless Congress acts to prevent tax increases and spending cuts that are scheduled to be implemented. Higher taxes are widely regarded as a drag on growth because they remove money from the hands of savers and consumers. Spending cuts are seen to have a similar effect because they keep money from entering into circulation.
 
The tax hikes result from the expiration of low rates enacted under the George W. Bush administration plus a new tax on high earners to help pay for President Obama’s health care program. The spending cuts are across-the-board reductions authorized in 2011 as part of the bill that raised the debt ceiling – the amount that the federal government is allowed to borrow. Economic growth is expected to be up to 4 percent lower in 2013 without legislation to prevent the changes in taxation and spending. The economy isn’t even growing at 2 percent now, so while likening a 4 percent drag to going over a cliff may amount to hyperbole, it’s certainly fair to say that things would start rolling downhill in a hurry.
-Conrad de Aenlle



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