Failure To Deal With Fiscal Cliff Could Lead To Recession

President Barack Obama won't get too long to savor his victory, as the "fiscal cliff" looms large on the horizon.

Lost in all of the excitement of the Presidential election was a recent press release from the U.S. Department of the Treasury titled "Treasury Assistant Secretary for Financial Markets Matthew Rutherford November 2012 Quarterly Refunding Statement".

The statement contained this line:

"Treasury continues to expect the debt limit to be reached near the end of 2012."

Remember the craziness when the debt ceiling needed to be increased in the summer of 2011? Remember the tension, remember the posturing, remember the apocalyptic warnings of what would happen if the ceiling wasn't raised? Remember the downgrade of US credit that followed?

A repeat of this situation is rapidly approaching. This time, however, could be much messier.

Not only will politicians in Washington have to increase the debt ceiling, but they are also going to have to figure out what to do about a number of expiring tax provisions and automatic spending cuts that are about to be automatically triggered. These expiring tax provisions and spending cuts are collectively known as the "fiscal cliff".

From our fiscal cliff definition page:

"For instance, the Bush tax cuts are currently scheduled to expire at the end of 2012. In addition, provisions that limit the reach of the AMT and cut payroll taxes are also scheduled to expire at the end of the year.

On top of that, automatic spending cuts, as per the language laid out in the Budget Control Act of 2011, are also currently planned for the 2013 fiscal year."

The CBO ("Congressional Budget Office") has already predicted that a failure to avoid the "fiscal cliff" would likely result in the United States tipping back into another recession. For that reason, the stakes are quite high.

--

The clock is ticking, as the Republicans and Democrats only have a couple of months left to fashion a deal.

Will the two sides be able to come together after a bitter and contentious Presidential election? Will the two sides be able to come together to do a deal with the country as polarized as ever?

Source: Treasury.gov

Filed under: General Knowledge