The fiscal cliff: Its many paths to a family’s financial ruin

Good news! Accord­ing to the Fed­eral Reserve’s Sep­tem­ber “cen­tral ten­dency” fore­cast, the U.S. economy’s out­look for 2013 has improved. Next year should see real GDP expand within the range of 2.5 per­cent to 3.0 per­cent after a dis­ap­point­ing 2012, which the Fed crystal-ballers expect to come in at about 1.7 per­cent to 2.0 per­cent. And with that 2013 eco­nomic growth rate the Fed believes the nation’s unem­ploy­ment rate will drop to some­where within the range of 7.6 per­cent to 7.9 per­cent. All-in-all, not a bad outlook.

Bad news? A month ear­lier the Con­gres­sional Bud­get Office released their pro­jec­tions regard­ing the 2013 eco­nomic out­look and there was a mod­est dif­fer­ence. Accord­ing to the CBO, the U.S. econ­omy could expe­ri­ence a reces­sion in 2013, with GDP falling by nearly 3 per­cent in the year’s first half before reg­is­ter­ing a mod­est pickup in the sec­ond half. For the over­all year (from fourth quar­ter, 2012 through fourth quar­ter, 2013), real GDP would drop by 0.5 per­cent and the unem­ploy­ment rate would aver­age 9.1 per­cent dur­ing the fourth quar­ter of 2013.

So what gives? How can there be such a mon­strous dif­fer­ence in the fore­casts of these two gov­ern­ment institutions?

In one case — the Fed­eral Reserve pro­jec­tions — the impact of the so-called “fis­cal cliff” seems to be ignored, while in the other case — the CBO out­look — we are given a peak into the con­se­quences of gov­ern­ment paral­y­sis should politi­cians allow the nation to tum­ble over the fis­cal cliff.

While many of us have prob­a­bly heard about the eco­nomic apoc­a­lypse that occurs at year’s end, it may be vitally impor­tant to under­stand some of its var­i­ous ele­ments. Per­haps some aspects of the fis­cal cliff will be “fixed” while oth­ers may well be allowed to auto­mat­i­cally take place and put down­ward pres­sure on the economy.

Included among the major com­po­nents of the changes which could severely impact the finances of Amer­i­can fam­i­lies that auto­mat­i­cally take place on Jan. 1 of next year with­out Congressional/Presidential approval are the following:

• All Bush-era income tax rate reduc­tions enacted in 2001 will come to an end and tax rates for the vast major­ity of those pay­ing fed­eral income taxes will rise significantly.

• ­Some high income groups will lose (in part or in full) some deduc­tions or exemp­tions in deter­min­ing fed­eral income tax obligations.

• The child care tax credit will fall to $500 per child from $1000.

• The Amer­i­can Oppor­tu­nity Tax Credit (one path to use when financ­ing a col­lege edu­ca­tion) will expire.

• The expan­sion of eli­gi­bil­ity for some indi­vid­u­als cur­rently obtain­ing funds through the Earned Income Tax Credit will end.

• A tem­po­rary mar­riage tax penalty relief pro­gram will expire.

• The pay­roll tax hol­i­day which reduced the Social Secu­rity tax rate paid by indi­vid­u­als from 6.2 per­cent to 4.2 per­cent over the past two years will expire, thereby imme­di­ately reduc­ing after-tax income of work­ing Amer­i­cans pay­ing into the Social Secu­rity Sys­tem by 2 per­cent­age points.

• All fed­eral extended unem­ploy­ment ben­e­fits will come to an end and the max­i­mum num­ber of weeks a per­son can obtain ben­e­fits will drop to 26 weeks.

• The Medicare “doc fix” for pri­mary care physi­cians will end and reim­burse­ment rates pro­vided by the fed­eral gov­ern­ment will drop by an esti­mated 27.4 per­cent, caus­ing some fam­ily physi­cians to restrict/stop accept­ing Medicare patients.

Taken together the above auto­matic changes (which do not rep­re­sent all aspects of the fis­cal cliff) amount to a nearly $500 bil­lion hit, or approx­i­mately 3 per­cent of GDP. Is it any won­der that the CBO 2013 out­look, which assumes all aspects of the fis­cal cliff are imple­mented, is so much more depress­ing than the Fed’s out­look, which seems to ignore all of the above.

But the cliff goes even fur­ther. Under pro­vi­sions of the Bud­get Con­trol Act of 2011, some $1.2 tril­lion in auto­matic spend­ing cuts must take place over the 10 years between 2012 and 2021 (inclu­sive). In an effort to put the pain off until after the 2012 elec­tions, politi­cians set the cuts at zero for 2012; with 2013 being the first year for a bite out of fed­eral spend­ing. Total auto­matic expen­di­ture reduc­tions will be about $110 bil­lion next year, with half from impacted defense bud­gets and half from impacted non-defense bud­gets (which excludes some enti­tle­ment programs).

So there you have it. Take your best guess as to what may hap­pen. After all, there are many paths to eco­nomic perdition.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Oct 17 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.