So What is the Fiscal Cliff?

If you’ve been listening to American politics at the moment you will almost certainly have heard of the term ‘fiscal cliff’. Basically it is a series of tax rises and spending cuts that will go into effect in January 2013 unless Congress brokers a compromise and passes new legislation. The combined effect of the spending cuts and tax rises, most experts agree, would push America back into recession during the summer of 2013 (remember a recession is defined  as two quarters in a row with negative growth in an economy).

So what are the tax rises and spending cuts? Well most of the spending cuts are a result of a political battle that took place last year. Basically in 2011 the political system of the US was in disarray, the Republicans (who controlled the House) were refusing to raise the debt ceiling (and therefore cause America to default on its debts and send the American – and world – economy into freefall), unless they got certain radical laws passed. The Democrats who controlled the Senate and Presidency were unwilling to give in to all of the radical demands. A deal was finally agreed just days before the US reached the debt ceiling and defaulted. Part of the Budget Control Act of 2011 was that if Congress did not pass a deficit reduction bill worth $1.2 trillion by the 2^nd of January 2013 then automatic cuts (sequestrations) would take place across the board, half from defence, half from domestic spending. As well as this, federal unemployment benefits, the bush tax cuts and the payroll tax cut would all expire, tax thresholds would return to their 2000 level and new taxes would be imposed.

Part of the problem here is that Republicans want to take more from domestic spending rather than defence (which is the Holy cow to Republicans), whereas Democrats are on the opposite side. Obama is trying to persuade the Republicans to let the bush tax cuts expire, but only for the top 2%, the tax cuts for the other 98% would be made permanent. There is also talk of cutting social security, which has infuriated ordinary liberals and many Democrats in congress as social security doesn’t contribute to the deficit and actually has a surplus!

To make matters worse, the Republican Speaker of the House, John Boehner, has just suffered a humiliating, self-inflicted, defeat. John Boehner tried to pass a bill in the House called ‘Plan B’, which was basically a Republican wish list of everything they wanted. Boehner knew it would never even get looked at in the Democratic Senate, so he didn’t pass it for policy reasons. Boehner was trying to put on a show of strength and make the Republicans seem united against President Obama. The only problem; he had to cancel the vote when he realised that he would not have the support to get it through the Republican House. As a result he sent the House of Representatives home for Christmas. Seriously. Although they will be back after Christmas, there will only be six full days until the new year. American politics could get very interesting over the next couple of weeks; if Congress and the President fail to reach a compromise then the effects will be devastating. Expect stock markets to plummet across the globe instantaneously, and here in Britain we will almost certainly experience a triple dip recession. Yay.