What is Fiscal Cliff? Everything You Need To Know

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Recently a popular term in world news, the fiscal cliff is very much discussed and feared by portfolio managers and investors.

What does the fiscal cliff stand for? A lot of people are concerned by the question these days.

The fiscal cliff is a number of laws put in place recently in the United States to increase taxes and cuts in order to stop inflation and restore economy. During his presidency, George W. Bush cut down certain taxes. Soon this policy will end and when that time comes tax will rise again in order to sustain the shaken economy. Other factor is the Budget Control Act of 2011 which cuts down board spending.

It is not easy to explain in simple words the fiscal cliff. It would be a lot easier if you comprehend a string of events that are connected to each other.

The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are the two clauses which are refereed to as Bush tax cuts. These acts had a crucial effect on the US population and economy. Bush tax cuts had to expire in 2010 during Barack Obama’s term. Obama’s new tax and income policy extended Bush tax cuts for two more years back in 2010. Now, that the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires, new acts need to be made in order to fix the economic gap. This event plays a major for the definition of the fiscal cliff.

Another thing to take into account is the board involvement into fiscal cliff phenomenon. A year ago the US Congress couldn’t find a two-party consensus on a debt-reduction deal over the Budget Control Act of 2011. In result the act will place automatic spending cuts in January. Over 10 year the amount of deficit reduction will be approximately 1.2 trillion dollars. This is the second major event which gave birth to the fiscal cliff.

Now, you should have a better understanding of the fiscal cliff. Here are some taxes and cuts consequences to be brought along.

$55 billion spending will be cut from levels such as food inspections, education, and air travel safety. Programs, projects and activities will suffer at least an 8% cut, by budget experts forecast. Other major domestic programs, such as Social Security, federal pensions and veterans’ benefits, are excluded from the spending cuts.

The last thing we have to understand is that the fiscal cliff is neither good, nor bad. If the fiscal cliff takes place, it would lead to the largest single-year drop in the annual deficit as a percent of the economy since 1969.

Though the fiscal cliff is unarguably harsh and unspecified and could also throw the United States back into a recession next year. In result, the economy may lose more than $500 billion.

It is uncertain how the fiscal cliff will affect the international market and the US in general. In the Middle East, currencies are pegged to the US Dollar. A weakened dollar would translate into a broader consequences to the local financial systems. We can only be sure that something big is about to happen.

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