Fiscal cliff

The United States fiscal cliff was a situation that came into existence in January 2013 whereby a series of previously enacted laws would come into effect simultaneously, increasing taxes while decreasing spending.

The Bush tax cuts of 2001, which had been extended for two years by the 2010 Tax Relief Act, were due to expire on December 31, 2012. Planned spending cuts under the Budget Control Act of 2011 also came into play. That Act was passed as a compromise to resolve a dispute concerning the United States debt ceiling and address the failure of the 111th Congress to pass a federal budget. Discretionary spending for federal agencies and cabinet departments would have been reduced through broad cuts referred to as budget sequestration. Mandatory programs, such as Social Security, Medicaid, federal pay (including military pay and pensions) and veterans' benefits would have been exempted from the spending cuts.

The fiscal cliff would have increased tax rates and decreased government spending through sequestration. This would lead to an operating deficit (the amount by which government spending exceeds its revenue) that was projected to be reduced by roughly half in 2013. The previously enacted laws leading to the fiscal cliff had been projected to result in a 19.63% increase in revenue and 0.25% reduction in spending from fiscal years 2012 to 2013. The Congressional Budget Office (CBO) had estimated that the fiscal cliff would have likely led to a mild recession with higher unemployment in 2013, followed by strengthening in the labor market with increased economic growth.

The American Taxpayer Relief Act of 2012 (ATRA) addressed the revenue side of the fiscal cliff by implementing smaller tax increases compared to the expiration of the Bush tax cuts. Adjustments to spending were expected to be resolved in early 2013. Intense debate and media coverage about the fiscal cliff drew widespread public attention during the end of 2012 because of its projected short-term fiscal and economic impact.

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