The fiscal cliff – and 100-trillion-pound gorilla in the room

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Hunter Johnson, Staff Writer

Just when America thinks that it has gotten itself out of the Great Recession, things could get much worse.

Such talk has surfaced post-election as the nation has turned its attention towards the looming spending crisis known as the fiscal cliff. To understand this financial conundrum, one must first know what the fiscal cliff actually is.

As defined by Investopedia, the fiscal cliff is the scheduled expiration of tax cuts coupled with across-the-board government spending cuts meant to reduce the federal budget deficit (the difference between how much money the government spends in a year from how much revenue actually comes into the government). The amount of money expected to be cut from the federal budget if the U.S. reaches the fiscal cliff would be well above $1 trillion.

As steep a number as that is, the budget situation being dealt with today pales in comparison to the fiscal gap – a debt issue that could have consequences stretching far beyond anything posed by the fiscal cliff.

For now, the massive spending cuts, not to mention potential tax hikes, posed by the fiscal cliff have many economists concerned. Given that the country is still crawling its way out of the Great Recession, such a large shock to its fiscal standing threatens to send America into yet another economic downturn.

The automatic spending cuts and tax hikes that make up the fiscal cliff were not expected to actually take place. Rather, the government’s main plan was a congressional ‘super committee’ consisting of Republican and Democratic members from both houses of Congress established to find a bipartisan way to cut spending and help reduce the government deficit.

The committee, created by the Budget Control Act of 2011, was expected to hash out a bipartisan deal before the end of 2011. But that never happened, which came as a surprise to few given the partisan gridlock in Washington. With that failure, the automatic cuts established in the fiscal cliff were set into motion.

Now, the President and members of Congress are once again at the negotiating table in an attempt to make another deal that would stave off the fiscal cliff. Such an agreement would deal with how much spending to cut and how high taxes should be raised on certain Americans if they are to be raised.

Once again, partisan differences make reaching any agreement difficult. Republicans favor making strong spending cuts with few-to-no tax hikes, while Democrats want to increase taxes on the wealthy while only making a few spending cuts. Not surprisingly, each side sees the other as totally wrong and finds the grounds for compromise elusive.

To make things harder, the opposing politicians leading the fiscal cliff debate have a relationship that is strained at best. Republican leaders in Congress, including House Speaker John Boehner and Senate Minority Leader Mitch McConnell, are notorious for not getting along with President Barack Obama. The animosity between these two sides is quite tangible, and unless they can put aside partisan differences entirely, coming up with a debt deal before the country plunges over the fiscal cliff will be anything but easy.

Even if the government manages to reach a deal before the end of this year, this episode is merely the tip of the iceberg when it comes to the financial crisis America faces. Something far greater, the fiscal gap, has to be dealt with.

As the government increases the deficit by spending more money than it takes it, it has to borrow money from other sources to meet the spending obligations it has made. Of course, borrowed money has to be paid back, and the debt that the government has added up to date is well over $16 trillion.

Dr. Tiffany Miller, a politics professor at UD, said in a recent roundtable discussion held by the politics Department that the U.S. has entered a phase of “permanent” deficits, where each year the government will continue to spend more than it brings in via revenue.

This is where the fiscal gap comes into play. Dr. Miller said that the fiscal gap is “not something you hear much about, but it’s the statistic you need to pay attention to.”

The fiscal gap “compares all future scheduled spending,” she said, “[and] makes all kinds of projections on what the costs of [government] programs will be.” These costs come from major programs like Social Security and Medicare, where the government has pledged to spend so much money regardless of revenue coming in.

The gap itself is the difference between the projected amount of spending and the estimated government revenue income in that time period. Unfortunately, over the next few decades that figure is enormous.

“You’ll see estimates ranging from $100 trillion upwards of $200 trillion,” Miller said. “The federal government has promised benefits $100 trillion in excess of the revenues it has scheduled to accept.”

That gap is money that will be added to the debt, making the country’s current debt of $16 trillion look miniscule.

The main question is what can be done about this predicament? Miller said it would take serious spending cuts coupled with large tax hikes – steps that sound similar to what the fiscal cliff may do in a few weeks but on a far larger scale. The problem, Miller said, is that people today are not taking this looming threat seriously.

“We’re not anywhere near serious about this at the moment,” she said, “because the American people have no idea how bad this situation is and don’t realize that the period of time where…the American people have enjoyed very generous government benefits with relatively low taxes is gone.”

 

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