User:RoyGoldsmith/United States fiscal cliff: Original

U.S. Federal budget deficit as % GDP assuming continuation of certain policies 2011-2021

The United States fiscal cliff is the time at which the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is set to expire and, simultaneously, the first round of sequestrations under the Budget Control Act of 2011 is scheduled to take effect. Without a change to federal law, this time would occur at midnight after December 31, 2012. Christine Romans of CNN said the current debt-ceiling may also expire "as early as December" 2012. The United States fiscal cliff crisis describes the period roughly between the 2012 federal elections and the end of the year when these matters are expected to be debated.

The tax cuts that are due to expire at the end of 2012 are:

• the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJC) and its continuation, which contain extensions of:
  • the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and
  • the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), together known as the "Bush tax cuts", and
  • the FICA payroll tax rate reduction;
• the temporary rates for the Alternative Minimum Tax (known as the AMT "patch")

among others.

The spending cuts that are scheduled to go into effect as of January 1, 2013, are contained in the Budget Control Act of 2011. It mandates "sequestrations" of one trillion dollars over nine years with $110 billion due to be cut in 2013. Half of these cuts would apply to programs like Defense, Homeland Security and Veterans Affairs and half to domestic spending (excluding Social Security, Medicaid, Medicare beneficiaries, civil and military employee pay and veterans). The extension of federal unemployment benefits is also set to expire at the same time.

Background

The Congressional Budget Office has estimated that letting current laws take effect would significantly reduce future budget deficits. These would reduce the deficit from an estimated 4.7% GDP in 2021 to 1.2% GDP. Total deficit reduction could be as high as $7.1 trillion over a decade if current law is enforced and not overridden.

The significant impact of the multiple tax cut expirations and spending reductions that take effect at the end of calendar year 2012 has been referred to as the "fiscal cliff." The CBO estimated in May 2012 that allowing current law to take effect would reduce the deficit by a net $560 billion in 2013, roughly half the $1.2 trillion 2011 deficit. But real GDP growth in 2013 would be reduced to 0.5% versus 1.1%, with a high probability of recession during the first half of the year (a 1.3% GDP contraction) followed by 2.3% growth in the second half.