What is America's 'fiscal cliff'?

President Obama has returned to Washington early from his Christmas break in Hawaii.
President Obama cut short his Christmas break in Hawaii to deal with 'fiscal cliff' negotiations. Photo: Reuters/Larry Downing

President Barack Obama cut short his Christmas holiday and returned to Washington in a last-ditch bid to prevent the American economy going over the so-called 'fiscal cliff' in the New Year.

The term was popularised by Ben Bernanke, chairman of the Federal Reserve, in an address in February 2012.

"Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases," he said.

"I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

That 'one date' is now upon us.

What is the 'fiscal cliff'?

  • On January 1st, temporary tax cuts and government spending measures, both designed to avert recession in the US, are due to expire.
  • Laws put in place to reduce the country's $16 trillion deficit will trigger tax increases and spending cuts as 2013 begins.
  • Economists are concerned that increased taxes will cut the spending power of America's middle class and push the country back into recession.
  • Democrats, led by President Obama, and Republicans, led by House of Representatives Speaker John Boehner (pronounced 'Bayner'), have so far failed to agree a package of policies as an alternative to the 'fiscal cliff' measures.

Can a deal be brokered?

  • Reports suggest that no such deal concerning new economic legislation over the 'fiscal cliff' is close to being made in the Senate.
  • If an agreement is not met by the end of the year, a short-term compromise is most likely, but the Democrats still need the support of the Republicans over potential tax burdens.

The history of the fiscal cliff:

  • In 2001 President George W Bush's administration wanted to pass through a programme of tax cuts worth an estimated $1.7bn.
  • The Republicans failed to secure the majority vote which the party needed in Congress and the proposals were pushed through under a rule that would result in the tax cuts expiring in 2011.
  • In 2010, two years' into Obama's first term in office, a deal was struck to extend the deadline for two years.