Understanding Fiscal Cliff

After the US presidential election the biggest issue which would make the election victory celebration sour for the winner is fiscal cliff as many analyst and experts of economics are predicting that there is no way that Fiscal Cliff can be avoided, so the question is what does this term mean. Well In simple words Fiscal cliff means problem for the superpower of the world (USA), it refers to a situation where there would be 2 problems simultaneously; let’s look at both the problems in order to understand this term better –

  1. Cutting of Government Expenditure – Government would be cutting spending on various government projects like infrastructure, health, education and other such planned expenditure and therefore it leads to less flow of money into the economy leading to unemployment, lower economic growth and ultimately leading to United States of America going back into recession.
  2. Increasing Tax Rates – While cutting of expenditure is the one part of the problem the other part is increasing the tax burden on the tax payers by raising the tax rates across the board which will again lead to burden on normal people and also will result in lower disposable income in the hands of people leading to less expenditure by them which again is a recipe for lower economic growth.

The primary reason for this situation arising is that federal budget deficit has been growing over the past few years and in order to curb the deficit these steps have to be taken as early as possible because delaying the procedure would only mean more deficit leading to even more strict measures in the future.

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