I can tell you that the Fiscal Cliff has now officially crossed over from being a financial media wonky thing to becoming a mainstream fear point as of this afternoon. How do I know? Because Fidelity just did an e-blast to god knows how many million mom-n-pop recipients just now.
Here’s Gary Blank, senior vice president, public affairs and policy at Fido on what you need to be aware of before the hysteria begins…
Federal Reserve Chairman Ben Bernanke and a number of observers have used the term “fiscal cliff” to describe several big fiscal events set to occur in the U.S. at the end of this year and in early 2013. Among them:
- The expiration of the Bush-era tax cuts at the end of 2012, including current lower tax rates on capital gains, dividends, income, and estates, as well as number of other measures.
- The expiration of fiscal stimulus measures, such as the payroll tax cut and extended unemployment benefits.
- Spending cuts scheduled to be triggered automatically in January 2013 as a result of the failure of the deficit reduction super committee last year.
Depending on estimates, the impact of all these actions taken together would be a fiscal shock on the order of $300 billion to $600 billion in just one year. Such policies would reduce the budget deficit and begin to address the nation’s increasingly worrisome debt situation. However, economists generally agree that allowing the fiscal cliff to take effect in full, at the same time, could have a substantially negative impact on the economy in 2013. But that isn’t necessarily going to happen. I see four possible scenarios.
Scenario 1: punt
A likely scenario is that Congress and the president agree to punt the issue into 2013. If this occurs, the tax cuts will not expire, tax increases won’t take effect, and the spending cuts will be delayed until after the presidential inauguration and new Congress arrives in 2013.
Scenario 2: modest compromise
Congress and the White House reach compromises on some tax and spending provisions, with the election having a significant impact on what those compromises might be.
Scenario 3: over the cliff
A less-likely scenario, I think, is that Congress and the White House fail to reach any compromise whatsoever and are unable even to agree on how to delay the looming measures. The economy goes over the cliff.
Scenario 4: grand bargain
In my view, the chance of a grand bargain taking place after the election and before the end of the year is a long shot. In this scenario, Congress and the White House would reach a deal addressing tax, spending, and fiscal issues for the medium to long term.
Expect more, much more, as the summer wears on and mainstream awareness grows.
I’m really glad I snagged the official Twitter handle of the Fiscal Cliff: @thefiscalcliff