The Fiscal Cliff – What’s All The Hubbub?

The Fiscal Cliff has certainly dominated the conversation and news reporting since the election reaching a crescendo as we have neared the new year.  In the conversations I have heard, I find the most only have a vague idea of what “the fiscal cliff” is.  Because of the nature of news reporting, most figure it must be a bad thing.  So, what’s the hubbub?

The “fiscal cliff” is a catchy descriptive coined by Federal Reserve Chairman Ben Bernanke for a series of events that will occur should our friends in Congress fail to take action to rectify a situation they created a year ago when they kicked the can down the road, thereby avoiding dealing with the fiscal problems at that time.  So what exactly are we talking about.

Four major events will occur with the advent of the new year – Tax increases; cuts in National Defense; reductions in medicare reimbursement ; and expiration of unemployment benefits.  So, is it really that bad?  Let’s dig a bit deeper.

Tax Increases – Most people are aware that the tax cuts enacted under President George W. Bush expire at the end of this year (2012).  This alone will result in an average increase of $1,400 in taxes for the tax paying family household.  But, that’s not all.  Combined with the “Bush tax cuts”, a half-dozen other tax increases will take effect resulting in a tax increase of close to $500 billion, representing the largest tax increase in the history of the United States.  Yup, the tax increase is a big deal!

Cuts in National Defense – The largest discretionary component of the Federal budget is the Department of Defense.  When Congress needed to find a place to make cuts in 2011 it turned to National Defense.  Almost 50% of the total spending cuts agreed to in crafting the Budget Control Act of 2011, were born by the Department of Defense.  This isn’t belt tightening, it’s gutting the military in an era of growing hostility and threats.

Reductions in Medicare Reimbursement –  The cost of medical care historically has had the highest rate of growth of any budgetary segment of the Federal budget.  In an attempt to slow the rate of growth, Congress initiated a formula to reduce the amount paid to physicians, but they fiddled with ways to keep paying them.  The jig is up.  Dealing with a major adverse impact on providers can’t be avoided any longer.  Physicians will experience an almost 30% decrease in reimbursement.  Considering they are only paid about 50% of what they bill now, treating medicare eligible patients will become unaffordable.

Expiration of Unemployment Benefits – Previously those who become unemployed were eligible for benefits for 26 weeks.  Congress gradually extended those benefits to almost 2 years, but has since reduced them to 77 weeks which is still almost a year and a half.  The Federal government has been funding 100% of these payments.  However, those funds expire on December 31.  Over $25 billion is needed to cover just the remaining 9 months of fiscal year 2013.

Is there a cliff?  Clearly there is a cliff with a very deep canyon.  In the words of President Ronald Reagan, government isn’t the solution, government is the problem.  Each time the government has attempted to fix the problem, they have only made it worse.  At the time of this article, Congress has failed again to come up with a solution to avoid the fiscal cliff.

Source for much of the data contained in this article is the Heritage Foundation.

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