Though the U.S. economy is recovering from the recent financial crisis, the forecasts for its future are not quite optimistic. One of the biggest threats for the USA is the incremental debt problem, due to which the political leaders are debating in order to find consensual and wise solutions. They try to make some decisions for reducing the long-term nation’s debt and to stimulate the economy. Nevertheless, some of their decisions may be even harmful for the economy. For example, there is an agreement of implementing the Budget Control Act, aimed to cut the budget deficit, if the politicians do not reach any other deal before December 31, 2012. However, the Budget Control Act may cause a possible fiscal cliff in 2013, which will limit the economic growth and drive the country to the recession, if not depression.
The phrase “fiscal cliff” sounded first time during the Federal Reserve Chairman’s, Ben Bernanke, speech. He was talking about “a massive fiscal cliff of large spending cuts and taxes increases” during his required appearance before Congress (Koba, 2012). Since then, “fiscal cliff” has become a new frightening term describing the simultaneous increase in taxes and decrease in the government spending in 2013. The background of the fiscal cliff lies in the Budget Control Act of 2011, which will go into at midnight on December 31, 2012. This document was signed to solve the ever-growing problem concerning the American debt.
One of the aims of the Budget Control Act is to reduce the budget deficit by increasing earnings and decreasing expenditures. Many laws from the Budget Control Act will go into place, including the end of payroll tax cuts, several tax breaks for businesses, and the Bush income tax cut bill of 2001. Furthermore, some spending cuts will take place in many government programs, including cuts in the defense budget and some social programs. However, such fiscal shifts will have a significantly negative effect on the U.S. economy, which is in a very bad state now. The nominal GDP growth through the first nine months of 2012 was only 2%, and the economy is far away from the full employment (Rosenberg, 2012). Consequently, such changes can make these figures even worse, turning the economy into a new recession. According to The Economist (2012), the total hit, caused by the fiscal cliff, will be “about 5% of GDP”, which will have a significant impact on the U.S. economy. That is why the fiscal cliff issue is very urgent, and the politicians not only in the USA, but also in the whole world, are willing to avoid it.
There are few options to deal with this problem. First, the politicians should concentrate on the budget consolidation over the medium-term, instead of the short one, with its brief actions. In this way, the shifts will not be as rapid, and the hit of the economy will not be so significant. Second, the politicians can replace massive cutbacks with more targeted reductions. In this case, tax increases will be implemented to relatively strong taxpayers, while the weaker ones will hardly notice any changes in their tax rates. Such actions can reduce the negative effect of the Budget Control Act, and anticipate the recession.
Finally, if the worse comes to the worse, and the politicians do not reach any wise deal, they can repeal the Budget Control Act altogether and keep everything in the current state until reaching a new agreement. Some economists consider the last variant as the most possible due to the great amount of political contradictions and a very slow real progress in the negotiations process. However, the two political parties of the USA, Republicans and Democrats, should find a consensual solution for the fiscal cliff issue. Furthermore, they have to do it until the end of the year, because otherwise a new recession will occur.