The Incredible, Inedible Budget

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Fiscal Cliff: Projected Financial Impact

The Dow Jones has risen despite uncertain economic times, but could be due for a major correction if another recession hits. Image credit: StockCharts.com.

The negative fiscal consequences of going off the fiscal cliff in 2013 may be daunting. Given that tax increases and spending cuts are slated to occur at approximately the same time, the net impacts are likely to be magnified.

According to CCH, Inc., a publisher of news and information regarding taxes and regulations, a married family of four making $130,000 could see a tax increase of over $500 per month.

In addition, the mandated sequestration and spending cuts resulting from the failure of the Super Committee will begin, slated to be split evenly between domestic and defense spending.

The Congressional Budget Office has estimated the U.S. economy will shrink 3.9% during the first quarter of 2013 as a result of these combined changes.

Economy and Unemployment Linked

Axiomatically, as the economy wanes, unemployment waxes. The CBO has estimated that unemployment will rise nearly a full percent in 2013. Furthermore, with the economy mired in another recession and unemployment on the uptick, the stock market would inevitably decline, perhaps as precipitously as it did in 2008. During the previous recession, the Dow Jones fell from 14,165 to just 6,547 in less than two years. Lastly, with rising unemployment, a declining GDP and falling wealth, the risk of deflationary pressures once again taking hold would become front-and-center, wreaking potential devastation to balance sheets still not fully recovered from the effects of the Great Recession.

Another Recession Looming? The Ticking Clock

Complicating the already-muddled mess is the specter of the November elections. A quick solution would be hailed by incumbents as a demonstration of leadership, and concessions by either side could be trumpeted by the other as a victory. With Congress and the Executive branch having repeatedly practiced brinksmanship over the past few  years, another round of that is sure to be in the offing after the November elections.

At issue are firm lines in the sand that have been drawn by each side, which, to this point, have been completely non-negotiable. Democrats have insisted that “millionaires and billionaires” pay their fair share of new revenue increases, whereas Republicans have characterized increasing taxes on “job creators” during difficult economic times as a non-starter. Unless a compromise is reached, a new financial crisis draws ever closer, with politicians playing a neo-Nero role by beating each other over the head with the fiddle. Meanwhile, the U.S. economy stands to burn.

Resources:

Dinan, S. Congress’ ability to pass a budget grows more doubtful each year(2012). The Washington Times. Accessed on September 2, 2012.

Lesniewsky, N. Continuing Resolution Clears Way for Other Battles(2012). Roll Call. Accessed on September 2, 2012.

Reis, P. Ben Bernanke pushes Congress to avoid fiscal cliff(2012). Politico. Accessed on September 2, 2012.

Pender, K. ‘Fiscal Cliff’ Looms Ahead for Economy. (2012). SFGate. Accessed on September 2, 2012.

Gleckman, H. The Strange Comeback of Bowles-Simpson, the Budget Plan that Never Was. (2012). Forbes. Accessed on September 2, 2012.

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