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Cliff Diving

I sat down this morning to do some research on the “fiscal cliff” we, as a country, are preparing to swan-dive off of in early January 2013.  I have been hearing about this cliff for months and wondered what impact it would have on me and my family.  I started my investigation on the Congressional Budget Office website.  Right now, the CBO is offering us 2 different U.S. budgetary scenarios for the next ten years, 2012-2022.  The first scenario I will call Jumped Off Fiscal Cliff (#1), and the second, Cliff Averted but We Maintain Obama’s Fiscal Policies (#2).

Let’s examine #1 first.  Some of you may remember the delightful days of last Summer’s debt ceiling debate and the subsequent credit downgrade of the U.S. Treasury debt by Standard & Poor’s.  As legendary journalist Bob Woodward documents in his new book, The Price of Politics, President Obama, Congress, and a specially appointed Committee were all unable to reach an agreement on our debt / spending levels for 2012 and beyond.  As a result, an automatic $100 Billion in general spending cuts (called a “sequester”) will go into effect January 2013 – and every year for the following 9 years, for a total of $1 Trillion in spending cuts.

The White House said the fiscal cliff “would have a devastating impact on important defense and nondefense programs” and that “cuts in domestic spending would affect everything from government salaries and private-sector contracts to research, air traffic control, border patrol, food safety, the FBI, housing programs, food assistance, after-school programs and education grants.”

The second part of the “fiscal cliff” is the expiration of the “Bush tax cuts” from 2001, bringing every single tax-paying American’s overall percentage back up to their pre-Bush tax bracket.  For example, if your current federal income tax rate is currently 25 / 28 / 33 / 35 %, it will increase 3% or more to 28 / 31 / 36 / 39.6 % on January 1, 2013.  And we’re not done.  The payroll tax, which funds the Social Security program, is set to increase from 4.2% to 6.1% in December 2012.

If scenario #1 takes place, the CBO estimates that “such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013” (unemployment is currently at 8.1%).  The one bright spot under this scenario is that our spending deficit would be greatly reduced: “the deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012.”

To avoid the fliscal cliff, Congress would have to vote before the end of 2012 to extend both tax cuts as well as come to an agreement on an alternate spending cut program that supercedes the automatic $1 trillion across-the-board cuts.  This is where scenario #2 becomes a possibility.  Keeping all fiscal policies the same as they are now, “the deficit would total $1.0 trillion” at the end of 2013 and “Real GDP would grow by 1.7 percent between the fourth quarter of 2012 and the fourth quarter of 2013, and the unemployment rate would be about 8 percent”.  The CBO ends it report with a statement that I pray all Americans will read:  “Ultimately, the policies assumed in the alternative fiscal scenario (#2) would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.”

The CBO tells us that our current levels of spending and debt accumulation are unsustainable, even over a ten year period.  “For fiscal year 2012 (which ends on September 30), the federal budget deficit will total $1.1 trillion, marking the fourth year in a row with a deficit of more than $1 trillion.”

Unfortunately, neither of these scenarios sound like a good path to me.  The first guarantees another recession and the second is unsustainable.  This is why I have come to the conclusion in this Election Season that we need a change in the leadership in Washington DC.  Echoing what I said in my last post, this is a critical time for our country financially.  It’s important that we start to live within our means, setting budgets and sticking to them, shrinking the size of government, and not putting an unfair and undue financial burden on our children and grandchildren.