Explain the "Fiscal Cliff."

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The term “fiscal cliff” was used to refer to tax increases and spending cuts that were due to take place on January 1, 2013.  The word “fiscal” was used because taxes and spending are parts of fiscal policy.  The word “cliff” was used because it was said that allowing the tax increases and spending cuts to take place would severely damage the economy.  The image was that the economy would be a car that was driven off a cliff to crash at its bottom.

At least since 2010, there has been a great deal of controversy over how to reduce the federal budget deficit.  The government started to incur a huge deficit as President Obama used increased spending to try to get the US out of the terrible economic slump that began in 2008.  Once the worst was over, people started to worry about the deficit.

There are two ways to reduce a deficit.  You can raise taxes or reduce spending.  Democrats generally wanted to raise taxes, particularly on people with higher incomes.  Republicans wanted to reduce spending.  The two sides could not agree so they kept putting the issue off.  There was a deadline of January 1, 2013 when tax hikes and spending cuts would be made automatically unless Congress and the President could agree on what to do.  The two sides could not agree until the actual day of the deadline.  Even then, they only passed temporary measures, leading to the “sequester” of government spending that began in March of 2013.

So, the fiscal cliff was the automatic tax increases and spending cuts that were to (but did not) kick in on January 1, 2013.


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