It is looming!!! In his recent congressional testimony, Fed Chairman Bernanke stated, “Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.” This is the date when the Bush-era tax cuts, the temporary payroll tax cut and extended unemployment benefits are all due to expire. To make matters worse – since the Congressional Super-Committee failed to reach consensus last year on reducing government spending we will also see $1.2 trillion of automatic spending cuts begin on the same date. Combining tax increases with spending cuts could push our economy back into recession. It is anticipated that economic output would be reduced by 3.5% next year if all these things come to pass.
We remain hopeful that a more thoughtful approach is taken regarding spending and tax cuts by Congress and the President prior to meeting the fiscal cliff Chairman Bernanke speaks of. However, the risk of policy errors and continued political dysfunction, particularly in an election year, remains very high. We will continue to monitor these issues closely as the year progresses.