The Fiscal Cliff: Our Financial Future

With all of the news coverage about the fiscal cliff, it can be difficult to tell fact from fiction concerning our financial future. Here’s what you need to know.

The Status Quo

Unfortunately, our representatives have put us in a tight position: the Budget Control Act includes massive spending cuts due to start at the beginning of 2013, simply because our congressmen and women couldn’t reach a deal to reduce spending. While spending reductions are the direction our country needs to be headed in, this program includes a $55 billion decrease in the military budget. If we’re going to start drastically cutting budgets, we shouldn’t start by crippling our defense systems. These massive budget cuts haven’t been properly planned and accounted for, and they have the ability to interfere with both military and government operations.

Another provision of the Budget Control Act is that the Bush-era tax cuts will expire and taxes on everyone will be raised at least 5 percent. Individuals currently paying 15 percent tax rates will now pay taxes at 28 percent, a drastic increase in taxes for working-class Americans who have already been hit hard by our collapsing economy. The exemption that currently allows low-income couples to file taxes together in order to save money will also expire, raising the income taxes due from each couple that files joint taxes across the country.

In the current tax rules, there is an exemption for seniors collecting Social Security: they’re taxed at just 4.2 percent. These exemptions will expire when the fiscal cliff occurs in early 2013, and individuals collecting Social Security will be forced to pay taxes at 6.2 percent. In total, over $7 trillion in tax increases will occur. Such high tax increases are unacceptable in any situation, but even less forgivable when you consider why they’re happening: our representatives in Congress simply could not do their jobs.

This raises a bigger question: is our system in Washington broken? It seems to be, if our representatives are so stricken by inaction and lack of motivation that they can’t reach a compromise to avoid huge tax increases on hard working Americans. The fiscal cliff aims to cut spending and raise taxes in order to decrease our deficit. That is certainly the direction that we need to move in: a smaller government that holds much less debt than it currently does. The important factor here is time. The government cannot take a debt that was decades in the making and eradicate it overnight. Attempts to do that are simply going to place our economy in an extremely fragile position.

The Future Outlook

If President Obama and congressional representatives can’t reach a deal to prevent the worst parts of the fiscal cliff from occurring, there is no doubt that we will be re-entering a recession within the next year. Taxes on every single U.S. resident will increase at the same time that the government will be spending far less on benefits programs.

Reports from major news outlets show that investors are increasingly worried about a new recession, and stock prices are staying cheap as a result. That investors are worried is a bad enough sign—they could wreak havoc on the market by preparing for the recession they may feel is coming. It is also worrisome that stock prices are low—they were similarly situated before the last economic downturn began in 2007.

A report from the Congressional Budget Office shows that the fiscal cliff would likely drive unemployment back up to 9.1 percent. It has taken years to get our unemployment numbers down to where they are; we cannot afford to move backwards. There is no doubt that should the fiscal cliff occur, our country will move back into a recession. The real risk to our country here is not being in another recession; there is a unique risk that is posed by what experts call a “double-dip recession.”

A double-dip recession poses a great risk to our economic recovery: it is much harder for the economy to recover from an economic collapse when consumer confidence is low. When a double-dip recession occurs, it increases the likelihood of a longer recession that can continue to spiral downward. The recurring problems in consumer and investor confidence caused by double-dip recessions can have negative impacts on economic growth and recovery for years to come, and we cannot afford to experience the kind of double-dip recession that Britain has recently seen.

How To Avoid It

There are only two strategies to avoid the fiscal cliff, and as each day passes without compromise, it seems unlikely that there will be a resolution to this country’s most pressing economic dilemma. Lawmakers could reach a compromise that would cancel all of the tax increases and spending cuts. This would not really be a compromise, though it would avoid some of the most extreme portions of the Budget Control Act. This would really just increase our debt while putting off economic collapse a short while. Lawmakers could reach an actual compromise, balancing tax increases and spending cuts in a way that is both politically palatable and conducive to economic vitality. All of the political grandstanding that seems to take precedence over actual legislative work makes this seem likely an unlikely option.

Citizens and voters need to make a concerted effort over these next few weeks to reach out to their representatives and lawmakers, sending the clear and unadulterated message that if they do not act to prevent the fiscal cliff, they won’t be re-elected. At the very least, Congress can be urged to pass a temporary measure lasting through 2013 that will prevent the fiscal cliff changes from occurring while further attempts to reach a compromise take place. Even a strategy that implements one half of the fiscal cliff changes—the tax increases without the spending cuts, for example—would likely prevent the risk of a double dip recession. If Congress doesn’t pass new legislation to deal with our growing budget and prevent the fiscal cliff changes, December 31^st is going to be a particularly bleak day for our economic future.