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While thrilled at being given another four years to continue the path he had carved out for the country, President Obama's celebration was short-lived. That's because the day after being re-elected the President had to begin working on resolving what is being called a 'Fiscal Cliff' - So what is this cliff that has everybody in a tizzy and are things going to be as dire for Americans as predicted? Read on . . . .
Coined by Federal Reserve Chairman Ben Bernanke last February, 'Fiscal Cliff' is a wicked brew of tax increases, expiration of existing tax breaks and cuts in government spending. Enacted by Congress in 2011 as a way to reduce the increasing US budget deficit (excess of government spending over tax collections), they are all scheduled to go into effect on January 1st, 2013.
Among the various changes is the expiration of a 2% payroll tax cut for individuals and some tax exemptions for small businesses that were enacted in 2011, to help the economy recover. This means that most Americans will pay extra in taxes and take home a smaller paycheck.
Added to this, is the end of a slew of tax exemptions passed by President George Bush in 2001 and 2003 - Originally scheduled to expire in 2010, they were allowed to continue by President Obama for another 2 years. However, this time around while the House has voted to allow them to continue, the President is vetoing the decision and instead proposing that they are continued only for people that make less than $250,000 USD a year.
If that isn't enough, Americans will also be subjected to additional taxes related to the new healthcare law dubbed Obamacare that also goes into effect on January 1st.
And that's not all. In 2011, concerns about the country's growing debt led to the passing of a spending cuts bill. Per the terms over 1,000 government programs in branches ranging from Defense to Medicare will be automatically eliminated. The money saved on these will purportedly go a long way in reducing our budget deficit that is expected to reach an astronomical 1.4 trillion dollars in 2013.
So what is the net impact of these various measures? According to experts, pretty dire, especially given the current economic situation. They estimate that if everything goes into effect the country's gross domestic product (GDP)would be reduced by 4% and that about 2 million people or 1 percent of the population would lose their jobs - Adding to the existing 7.9% unemployment rate.
Also, just hearing about all these scary predictions may make Americans nervous, which would hurt further, since they will most likely stop spending as freely - Not a great scenario given that we are about to head into the year's biggest shopping season - Christmas.
On the positive side it will help reduce the fiscal deficit by about 600 billion USD, which would be a very big step in the right direction. Also, while dramatically dubbed 'cliff' the impact of all these will not be felt immediately, but will be quite gradual, especially at first. There are also some that believe that while 2013 may be a little tough these measures will actually help improve US GDP growth in the years thereafter.
And, there is always the chance that the leaders of the country will come together irrespective of party politics and devise a solution that is more akin to a 'gentle' hill than cliff. If past compromises are any indication that is exactly what we expect will happen come January 1st, 2013!
Resources: About.com, nbc.com,businessweek.com