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Overview

As Congressional leaders and the President negotiate a deal designed to avoid the “Fiscal Cliff”, the drama of the public back-and-forth in Washington often obscures the consequences of failing to reach an agreement. The Fiscal Cliff is made up of significant increases in personal and business taxes and dramatic decreases in federal government spending scheduled to take effect in January 2013. If these policies take effect (a.k.a. “going over the Fiscal Cliff”), they would impact individual families and businesses, as well the broader economy.

What does the Fiscal Cliff mean for federal spending?

The failure of the 2011 Super Committee to agree to a budget savings deal set into motion a process called “sequestration”, which mandates a total of $1.2 trillion in federal spending cuts over the next ten years. These cuts affect programs across the government, including defense programs, non-defense programs, and Medicare provider reimbursements. In addition to these sequestration cuts, the current extension of unemployment insurance and a temporary patch that prevents scheduled Medicare cuts are both scheduled to expire on December 31, further reducing 2013 federal spending by approximately $26 billion and $25 billion, respectively.

How will these spending cuts affect the economy?

These scheduled cuts will remove hundreds of billions in spending from the economy and significantly affecting those who benefit from the affected programs. Program spending supports millions of jobs for government employees and contractors, while direct payments like unemployment insurance or farm insurance infuse spending money into communities across the country. Economists expect the combination of spending cuts and tax increases scheduled for 2013 will push the U.S. economy into a recession and significantly increase the unemployment rate. A recent Regional Economics Models Inc (REMI) analysis estimates that a family of four stands to lose as much as $1,800 in income during 2013 alone, if these cuts move forward. On top of the direct impact of these reductions, if Congress fails to reach an agreement to avoid the Fiscal Cliff, rating agencies have indicated they intend to downgrade the government’s credit rating.

What are policymakers saying about Fiscal Cliff cuts?

Leaders in both parties have consistently opposed the Budget Control Act’s sequestration budget cuts as blunt method to reduce federal spending, highlighting the need to replace the across-the-board approach with targeted cuts to spending identified as wasteful. During his reelection campaign, President Obama expressed confidence that policymakers would not allow sequestration to take effect. Pentagon officials and others have decried scheduled defense program cuts, noting the role of defense-related employment in communities around the country. Yet, as negotiations unfold, the bipartisan consensus on replacing sequestration’s scheduled spending cuts with a more targeted approach has been superseded by the partisan divide over how to address 2013 tax rates.

Key Facts

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