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What is the Fiscal Cliff?

by Jonathan Masters
August 1, 2012

Cragged bluffs rise from the sea. (Courtesy Darren Harmon). Cragged bluffs rise from the sea. (Courtesy Darren Harmon).

Without timely action from Congress, the United States is set to undergo a drastic set of tax hikes and spending cuts at year’s end that could derail the nation’s fragile economic recovery. The budget measures, known collectively as the “fiscal cliff,” would automatically slash the federal deficit by $607 billion or approximately 4 percent of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office. In addition, Treasury is likely to reach its ability to borrow—the federal debt ceiling—around the same period.

Analysts say the coming months offer Republicans and Democrats yet another opportunity to strike a balance between the short-term measures needed to feed the recovery and the medium to long-term policies that will stabilize and eventually lower the debt. But few see good chances for a political compromise before the November election.

This Backgrounder examines the domestic and global implications of the coming fiscal showdown.

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