What Is the “Fiscal Cliff”?

With the presidential election decided, the talk in Washington now turns to the so-called fiscal cliff. Many economists worry that the combination of scheduled year-end tax increases and spending cuts will cause the economy to begin contracting again.

The focus will be on whether Democrats and Republicans can come to an agreement on a new plan before the automatic taxes and spending cuts take effect.

Here is some information from the Fox News Brainroom on the key issues you’re going to be hearing about in the coming months.

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Background

In August 2011, Obama signed into law The Budget Control Act of 2011. It allowed for an increase in the debt limit to be matched by spending cuts. The plan called for a Joint Select Committee on Deficit Reduction to present a plan that would be voted on by the Congress.

The law stated if the bill by the Joint Select Committee on Deficit Reduction is not enacted or if it contains less than $1.2 trillion in deficit reduction, then the remaining amount would be sequestered (across the board spending cuts).

Congress failed to enact the spending cuts so the automatic cuts will take place.
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Spending Cuts

The Sequestration or spending cuts will take place at the beginning of the year and will be equally divided between defense spending and domestic spending. It will reduce spending $1.2 trillion over ten years and about $100 billion in 2013.

The spending cuts will affect mostly discretionary programs but will have little effect on most entitlement programs.

Programs targeting low-income individuals and families would largely be exempt from the sequester.

In addition, no more than 2 percent of Medicare spending could be sequestered, and cuts could only fall on payments to providers, not to beneficiaries – a key Democratic demand.

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