The National Debt Ceiling: The "Other Cliff"

By now you probably know that the dreaded fiscal cliff has been averted, at least for a month or two.

The term fiscal cliff refers to the potential for a deeper recession that would have been triggered by the terms of the Budget Control Act of 2011 which was scheduled to go into effect on January 1, 2013. It was thought that if the Bush-era tax cuts were allowed to expire, thereby raising taxes for virtually everybody, at the same time that mandatory governmental spending cuts were scheduled to be implemented, there would be a devastating impact on the U.S. economy such that the economy would be in a free-fall … over the cliff.

The government narrowly avoided the fiscal cliff by passing the American Taxpayer Relief Act in these first days of 2013. The compromise that was reached focused primarily on tax relief and not spending cuts. The main impact will be on those taxpayers who are considered wealthy. However, if you were paying attention during the presidential campaigns, you will notice that the income threshold for those who are considered “wealthy” increased significantly from the time of campaigning to the thresholds established through this deal.

The next political hurdles are the negotiations on the spending cuts and the debt ceiling. Very simply, the debt ceiling is the maximum amount that the federal government can borrow at any given time and in-turn, pay its obligations that have already been incurred. If a compromise cannot be reached, the economy may go off the fiscal cliff despite the recent deal. Congress has about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations. If a deal is not made, a federal government shutdown is possible. This may include suspension of the payment of federal benefits and payroll, in addition to the shutdown of government departments such as the Internal Revenue Service, during the height of tax season… of course.

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