President Barack Obama’s election victory was met almost immediately by a panic over the economy pulling a Wile E. Coyote and running off then edge of the cliff, realizing there is nothing beneath it and then subsequently hurtling downwards into oblivion.
The “fiscal cliff” is a term that has been used to describe a bundle of U.S. federal tax increases and spending cuts that are due to take effect by early 2013. The Congressional Budget Office projects these measures set will automatically slash the federal budget deficit by $503 billion by January.
A few things need to be understood before we can look at how this situation will impact Americans come the start of 2013. The term “fiscal cliff” has actually been applied to two different economic scenarios by both journalists and politicians. Not only does this cause the term to become inherently convoluted, but it is wrong and has the potential to cause poor policy decision-making with the looming Jan. 1 deadline quickly approaching.
The first fiscal cliff scenario, according to Real Clear Politics, is when “the burden of debt gets so heavy that it triggers a financial collapse.” This was the original meaning of a “fiscal cliff.” According to the second scenario, a “fiscal cliff” is likely to occur in January if Democrats and Republicans cannot come to a budget deal regarding spending cuts and tax increases. While the term has evolved in recent months to apply to the latter scenario, we cannot neglect the original meaning; the debate surrounding this “fiscal cliff” term has become skewed because analysts, journalists and politicians are still using the words interchangeably. It is problematic to use the term “fiscal cliff” at all, as total financial collapse and a recession are very different indeed.
Despite the debate’s utilized terminologies having inherent flaws, the current budget situation in Congress is causing uneasiness among Americans nonetheless. If Congress cannot agree on a 2013 budget deal, an austerity crisis will be the ultimate result. This is, essentially, the exact opposite of what happened in Europe. Too much austerity, too quickly, many economists speculate, could result in a double-dip recession later on in 2013. This has led to many economists calling it the “fiscal slope,” as opposed to the more unforgiving “cliff.”
The $500 billion in tax increases and $200 billion in spending cuts set to take effect in January could lead to greater unemployment in the long run and fewer social programs to take care of those most affected by this, according to the Washington Post. There would be too much deficit reduction upfront. The sudden austerity measures would save the U.S. government more than $720 billion in 2013, which counts for about 5.1 percent of the gross domestic product. It would be taking money out of people’s paychecks and federal programs instead of letting the government put money into the economy
The main topics being debated to avoid the slope’s effects are revenue and entitlement programs. While both Democrats and Republicans have agreed that the top 2 percent of the nation’s wealthiest will need to pay more to yield greater tax revenues, they have yet to agree on those marginal tax increases that will affect the rich. Democrats have also proved unrelenting on cutting spending for several high-profile entitlement programs that will help decrease the deficit. Overall, both parties will need to concede on certain points so as to avoid letting this go too far into the 2013 calendar year.
If terms are not agreed upon, income taxes will return to what they were prior to the Bush presidency, ending the Bush tax cuts. Additionally, the temporary 2 percentage-point reduction in payroll taxes for Social Security and Medicare will expire. Finally, the “sequestion” of $1.2 trillion in automatic spending cuts over ten years will expire; these are the numbers Congress agreed to last year as a part of the debt-ceiling deal.
For us students, we can expect to see this austerity crisis impact federal student loans, college tax credits and Pell Grants. If the Higher Education Act is not renewed come 2013, there will be an automatic one-year extension, allowing students breathing room to avoid quick, drastic changes. However, if it is not taken care of with the future of student aid in mind, these quick, band-aid fixes will one day run out and prove detrimental to the education system as a whole.
The White House Office of Management and Budget expecting an 8.2 percent decrease in discretionary spending, meaning there will be less financial aid to go around. With the extension of unemployment benefits caught up in the negotiations, it could be harder for many families send their children to college. The number of semesters in which students can receive Pell Grants might also decrease and, therefore, impact education for low-income students. The combination of more students needing loans and less federal aid available could heavily impact higher education down the road.
Point is: we have time, but not much. The U.S. will not plummet into another Great Depression just days after the holidays if this is not resolved. However, it will have a drastic impact in the long run if it is not addressed sooner rather than later.
Policymakers need to keep this in mind; time is of the essence, but rash, last-stitch, fear-driven budget decisions will only result in poor negotiations and bad policy that will affect Americans for years to come.