The term âfiscal cliffâ refers to the effect of current laws which, if unchanged, could result in tax increases and government spending cuts beginning in 2013. These laws include tax increases due to the expiration of the Tax Relief Act of 2010 and spending cuts under the Budget Control Act of 2011. The projected year-over-year changes for fiscal years 2012â2013 include a 19.63 percent increase in tax revenue and a 0.25 percent reduction in fiscal spending. The severity of these changes, according to the Congressional Budget Office, could cause us to enter into a recession in 2013.
With the election now over, we find ourselves in a âwait stateâ to see what our government officials will do to prevent us from falling off the fiscal cliff. In a speech earlier this month, Federal Reserve Chairman Ben Bernanke repeated a warning that running over the $600 billion “cliff” of expiring tax cuts and government spending reductions could derail the U.S. recovery and said worries over how budget negotiations will be resolved were already damaging growth.
Businesses are holding off on making strategic moves to invest or grow their business until they see what actions, if any, the government will take to respond to the impending fiscal cliff. I have had a number of recent conversations with personal financial advisers that have differing views on the actions investors should take before year’s end. Some recommend liquidating investment portfolios and putting everything into cash to protect against a recession. Others are more optimistic that the government will take actions to defer the drastic tax increases to avert a recession and recommend to sit on your portfolios and ride it out.
The concerns have businesses and individuals caught standing still like deer staring into approaching headlights. Can the âlame duckâ congress take action within the next month before our ship goes over the edge? Wouldnât it be great to see our elected officials play nice together for a change? Former senators George Mitchell and Bob Dole, grownups who led the Senate’s Democrats and Republicans, respectively, in the 1990s, had dinner together every week and successfully did business; they also held each other in the highest personal regard and still do. Today, however, researchers at Princeton and the University of Georgia find that Republicans and Democrats in Congress are further apart than at any time in the 120-year period they studied.
Will 2013 be a year of continued economic recovery and improvement in employment rates? Or will we plunge over the cliff into another recession? If you have a crystal ball on this one, write in; we would love to hear from you.
Send your questions and ideas to: Sun Day, Frugal Forum Column, P.O. Box 7505, Algonquin, IL 60102, or, by email to: thefrugalforum@gmail.com.
