What is the Fiscal Cliff?

As a CFO in Phoenix for last few years it seems like every other week has been a fiscal cliff.  Now the national media is running stories about a “Fiscal Cliff” with the Federal Government.  What exactly are they talking about?  To understand we need to go back a couple of years.  At that time we were experiencing one of our routine budget emergencies.  The Country was facing a rapidly growing deficit that was quickly approaching the legal limit.  Unless something was done the Federal Government was facing a shut down.  Unfortunately the two parties couldn’t agree on a balance of revisions to taxes and spending but with the Country rapidly approaching the limit some bold action was needed.  Our leaders in Washington finally agreed to disagree and kick the can down the road by raising the limit but making no immediate changes to taxes or spending.  As a part of this decision they also agree that they did need to work together in the future to identify the cuts in spending and changes to taxes.  To insure follow through on this action they added a punitive provision that if they failed to enact needed change massive spending cuts and huge tax increases would automatically kick in.  Thus the “Fiscal Cliff” was born.

The spending cuts include major, across the board cuts to all areas, even previously protected areas such as defense.  The tax increases are also very significant and impact high earners, lower wage workers as well as the middle class.  If these actions were to go into effect it would be like doing surgery with chain saw but no one really worried because the results are so awful that our legislators would never let this happen.

That was then this is now.  Where we are now is that there has been no progress on the tax or spending fronts.  Without any action the Fiscal Cliff will start on January 1 and let’s face it, with the elections coming up next month the chances of any action are slim and none.  The impacts will be felt quickly as automatic spending cuts will begin to negatively impact the economy.  Defense spending is a major economic driver in Arizona and the state will quickly feel the impacts of reduced spending.  Additionally the tax increases are significant and will drain discretionary spending we need to keep the modest recovery going.  Not a very pretty picture I must say!

What can we do?  Not much except get out and vote and when we do vote keep in mind that the solution to this will require bi-partisan efforts.  We need to elect officials that will work to solve the problems not follow a predetermined ideology or even worse look to score points by beating his colleagues in the other party.  Hopefully a few of these exist.

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