The document discusses the "fiscal cliff" facing the U.S. government at the end of 2012, when tax cuts are set to expire and automatic spending cuts will be triggered. It explains that allowing these measures to take effect could cut the deficit in half over 10 years but also potentially push the economy back into recession, while canceling the tax increases and spending cuts would increase the deficit and debt burden. The Congressional Budget Office projects two scenarios for 2013-2022: the baseline scenario with lower deficits but also lower spending and higher taxes, and an alternative scenario with higher deficits from lower taxes and more spending.

1. Fiscal cliff/Nov 2012
Research Desk, Kochiwww.geojitcomtrade.com
What is Fiscal Cliff?
With elections in the U.S out of the way, the time to govern has arrived. The
pending “Fiscal Cliff” is all set to take effect in 2013 to test everyone’s mettle.
But before we go ahead, need to understand the term “Fiscal Cliff”, a popular
term used to describe the challenge that the U.S. government will face at the end
of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go
into effect.
Some of the key policy changes that are set to take effect at midnight on
December 31, 2012 would include an end to the payroll tax cuts, certain tax
breaks for businesses, shifts in the alternative minimum tax that would take a
larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes
related to President Obama’s health care law. Also, the spending cuts planned as
part of the debt ceiling in 2011 will also come into play.
Choices before the U.S lawmakers in dealing with the fiscal cliff:
 Allow the current policy scheduled for 2013 to kick start, which features
number of tax increases and spending cuts that are expected to weigh
heavily on the growth prospect and possibly drive the economy back
into recession. On the bright side of the picture, this choice would result
in deficit, as a percentage of GDP, cut in half.
 Policy makers can cancel scheduled tax increases and spending cuts and
extend the Bush-era tax cuts, but this would add to already burgeoning
deficit and increase the odds that the United States could face a crisis
similar to that which is recurrent in Europe. The debt in the U.S as a
result of this will continue to grow.
Congressional Budget Office projections
The Congressional Budget Office (CBO) has projected two fiscal scenarios for
the year 2013 to 2022 (Fig1).
 The baseline projection. This scenario would have lower deficits and
debt but also have lower spending and higher taxes.
 The alternative fiscal scenario. Higher deficits and debt but lower
taxes and higher spending.
FISCAL CLIFF
“Fiscal Cliff”, a popular term
used to describe the
challenge that the U.S.
government will face at the
end of 2012.
With the implementation of
the baseline projection, the
public debt rise would be
58% of GDP in 2022 in
contrast to 90% of GDP if the
Congress goes for the
alternate fiscal scenario.

2. Fiscal cliff/Nov 2012
Research Desk, Kochiwww.geojitcomtrade.com
The chart above clearly indicates that with the implementation of the baseline
projection, the public debt rise would be 58% of GDP in 2022 in contrast to
90% of GDP if the Congress goes for the alternate fiscal scenario (Fig 2), more
resemblance to the Bush tax cuts and spending increase.
The total deficit reduction over
ten years could be as high as $7.1
trillion, versus the $10–11 trillion
debt increases if current policies
are extended.
The Congressional Budget Office
(CBO) has projected two fiscal
scenarios for the year 2013 to
2022.
Fig 1-Source: www.cbo.gov
Fig 2-Publicly Held Federal Debt 1790-2009, Source- www.cbo.com

3. Fiscal cliff/Nov 2012
Research Desk, Kochiwww.geojitcomtrade.com
The total deficit reduction over ten years could be as high as $7.1 trillion, versus
the $10–11 trillion debt increases if current policies are extended. In other
words, roughly 70% of debt increases projected over the next 10 years could be
avoided by allowing laws on the books during 2012 to be implemented (Base
line projection).
Possible implications of the Fiscal Cliff
Incorporation of the baseline scenario in 2013 would cut the deficit in half and
significantly reduce the path of future deficits and debt increases for the next
decade and beyond. On the flipside, near term benefits of this deficit reduction
are likely to impact growth as it would cut gross domestic product (GDP) to
negative growth in 2013, sending the economy back into a recession.
On the employment front, it is expected that spending cuts and increased taxes
will send the unemployment rate up almost a full percentage point, with a loss
of about two million jobs, matter of grave concern amid an already torpid labor
situation in the U.S.
CBO estimates that if the baseline scenario is allowed to take effect in 2013, it
would reduce federal spending by $103 billion and increase tax revenues by
$399 billion (and another $105 billion in revenue) through September 2013.
This would amount to a net total of $560 billion, roughly half the $1.2 trillion
FY2011 deficit.
Tabulation of Possible Outcomes of the Fiscal Cliff
Economic Measures Baseline Scenario Alternative Fiscal
Scenario
Federal Deficit in 2013 $641B $1037B
Economic Growth in FY13 -0.5% of GDP 1.7% of GDP
Unemployment rate 9.1% 8%
Public debt in 2022 58% of GDP 90% of GDP
Conclusion
The term fiscal cliff is already playing mayhem on investor sentiments before
even 2013 begin, when the new changes go forth. Lack of resolution from the
policymakers is already causing households and business to amend their
spending in the wake of the impending changes, which is likely to impact on the
Q4 growth figures. However, the “Fiscal Cliff” does indicate an immediate
disaster at the beginning of 2013, but in the long run could pave way for
sustained growth and smaller debt for the world’s largest economy. In the
midst of an already-fragile recovery and elevated unemployment, this type of
shock will further hamper market and resident mood and therefore, Congress
could opt for an approach that would address the budget issues to a limited
extent, but have a more modest impact on growth.
Source: www.cbo.gov
Incorporation of the baseline
scenario in 2013 would cut the
deficit in half and significantly
reduce the path of future
deficits and debt increases for
the next decade and beyond.

4. Fiscal cliff/Nov 2012
Research Desk, Kochiwww.geojitcomtrade.com
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Author: Joyal Thomas