The Fiscal Cliff Explained

By | December 29, 2012 11:09 am

Fiscal Cliff means there is a limit over which government can borrow, once the limit is breached automatic reduction in government spending and tax increases come in effect.

So Basically Fiscal Cliff is an increase in taxes & reduction in government spending

On or around Jan. 1, about $500 billion in tax increases and $200 billion in spending cuts are scheduled to take effect. That’s equal to about four percent of GDP and can bring US economy back into recession.

So to avoid such disaster  US Senate will be working on Sunday ie 30th December which has happened only 18 times since 1880. If Senate is unable to come to a viable solution and fiscal cliff limits is crossed consequences will be dire as mentioned below:




  • Taxes would rise for nearly every taxpayer and many businesses.
  • Financing for most federal programs, military and domestic, would be cut.
  • More than $500 billion equals roughly 3 percent to 4 percent of gross domestic product.
  • An emergency unemployment-compensation program is expiring, which would save $26 billion but end payments to millions of Americans who remain jobless and have exhausted state benefits.
  • Medicare payments to doctors would be reduced 27 percent, or $11 billion
  • The biggest cut would be $65 billion, enacted across the board for most federal programs over the last nine months of fiscal year 2013, from January through September.



Can the US avoid falling off the cliff?

  • Democrats and Republicans have come up with rival plans to avert the crisis. In terms of cutting the US deficit, they vary by hundreds of billions of dollars over a 10-year period.
  • President Obama wants the borrowing limit increased and raised taxes on high earners as part of any deal, but Republicans have demanded concessions such as government spending cuts.
  • Only Congress, which is controlled by the Republicans, can raise the borrowing limit. It can also still act within the next month to minimise the impact of the fiscal cliff.
  • Meanwhile, the US government has signalled it’s ready to take extraordinary measures to prevent it defaulting on its debt, but it’s unclear how much time those would buy.
  • So to avoid such disaster  US Senate will be working on Sunday ie 30th December which has happened only 18 times since 1880

2 thoughts on “The Fiscal Cliff Explained

  1. Vijay

    Thanks Bramesh for such simple and straight explanation about Fiscal Cliff.

    Everyone talks about many events in the stock markets, but no one ever try to explain what they exactly mean. Even if someone explain, they make sure that it would go over the head of the small investors. I am not sure if they also really know about that event except the name.

    Thanks once again for your efforts to empower the small investors.


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