The Fiscal Cliff: What You Need To Know

The Fiscal Cliff: What You Need To Know

President Obama knows he must get both sides Congress to work together to avoid potential economic disaster.

The economy was a primary point of contention during the election, but now that the winner has been established it’s time to get to business. First up? The president must try to prevent the country from reeling back into a recession.

The fiscal cliff is what’s anticipated when the Budget Control Act of 2011 expires at midnight on New Year’s Day 2013. It’s an important day because it will undo many financial policies; it will reduce defense spending, allow the Bush tax cuts and the payroll tax holiday to expire, do away with extended unemployment aid and remove Medicare reimbursement cuts from doctors. These actions will eventually total $7 trillion.

There are a few options to mitigate the free-fall that awaits if action isn’t taken; the government could very well decide to not take any action and let everything expire. While this option could potentially cut the deficit in half, it will almost certainly stunt growth and send the economy back into a recession. Option two is cancel all of the policy, which will cause the deficit to increase. Or, the government could decide to replace a few cuts, which will keep the economy relatively stable but not growing.

None of the options are pretty, but something must be done. The country’s economy, debt burden and credit rating are all at stake if lawmakers don’t act quickly.

“Failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013,” Fitch Ratings warned in a statement the day after the election.

The global ratings agency contends the president will not have a “financial honeymoon.” The good news is that there is time to reach a solution, but it’s going to require a level of teamwork hard to come by in Washington. For his part, President Obama would like the spending cuts to be replaced and is pushing for the wealthiest Americans to have their taxes increased. Though a wait-and-see policy rules the day, experts anticipate that Congress will create a framework for implementation sooner rather than later.