July 23rd, 2012
10:36 AM ET

What is the "fiscal cliff"?

The "fiscal cliff" has replaced Europe as the biggest threat to the U.S.'s economic recovery.
The Washington Post puts it like this: "The main threat to the economy is shifting from what others may do to us to what we are doing to ourselves."

What are we doing?

Huge automatic tax increases: On January 1st next year, the Bush-era tax cuts and Alternative Minimum Tax (AMT) cuts expire. That means that if nothing changes, your taxes will likely go up. At the same time, Medicare doctor pay will go down.

Massive cuts to federal spending: If current law stays in place, the government must slash $1 trillion from spending over the next 9 years - half from defense, and half from non-defense departments.

The Bipartisan Policy Center says it will cost about a million jobs over 2 years - not just government jobs, but jobs in the private sector - many from contractors working with the government.

The economy is barely growing right now, and if it goes off the fiscal cliff, the Congressional Budget Office says economic output will shrink at a rate of 1.3% percent in the first half of next year, unless we back away from the fiscal cliff. That's a recession. Statements like that are very uncharacteristic of the CBO.

What makes this so scary is that this is all happening in an election year. No one expects congress to deal with these big issues until after November 6th.

Filed under: Your Money
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