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Two words invariably come up in every discussion of the nation's deficit crisis: fiscal cliff.
The warnings about the seriousness of this cliff are incessant from Washington and Wall Street; the term causes relentless political bickering among lawmakers.
[Related: Fiscal Cliff: "Major Market Meltdown" Expected If Congress Does Nothing, Says Steven Rattner]
The 'fiscal cliff' refers to the $1.2 trillion in spending cuts and $3 trillion in tax hikes that are scheduled to go into effect next January.
This lethal combination includes the Bush-era tax cuts and automatic reductions to defense and domestic discretionary spending, otherwise known as the sequestration. Congress put itself into this ominous predicament because a 12-member, bipartisan super committee tasked with targeting areas for deficit reduction could not compromise or reach an agreement. The committee ultimately walked away from its mission.
A report released late last week by the Office of Management and Budget provided an extremely detailed account of what would happen if Congress allowed the sequestration to go ahead as planned. Here's how the White House sees the cuts taking effect:
- Medicare would be slashed by 2%.
- Defense discretionary spending would drop by 9.4%.
- There would be fewer FBI agents, custom and border patrol agents, correctional officers and federal prosecutors.
- After school programs would be affected as well as programs that aid children with disabilities.
- The Department of Agriculture would inspect fewer food processing plants and the EPA's ability to prevent foodborne illnesses would be reduced.
"Sequestration would undermine investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle-class, seniors, and children," the report said. "The sequestration itself was never intended to be implemented. It is not the responsible way for our Nation to achieve deficit reduction."
[Related: Fiscal Cliff = "Enormous Hit" to the Economy, Holtz-Eakin Says]
Neither party in Congress wants the fiscal cliff to become a reality. But a decision to prevent this worst-case scenario from happening will likely come after the November election. David Gordon, director of research at political risk consulting firm Eurasia Group, says lawmakers will be able to deflect these fiscal cliff concerns.
"It's not that the cuts won't matter, it's that they won't happen," he says in an interview with The Daily Ticker. The fiscal cliff has "become a self-denying prophecy. That is, the more that people are aware that it is looming, the more they will act to prevent it from happening. Politicians will drive not off the cliff but back from the cliff."
[Related: Fiscal Cliff: 1 Million Defense Jobs at Risk by 2014]
Democrats and Republicans are both committed to fiscal discipline, he argues, and the two parties will "find a formula to postpone 90%" of those cuts from materializing. The dire situation that politicians repeatedly warn about will likely be pushed back a few more years, he says, and a serious discussion — or battle — about U.S. tax reform will not happen until some time next year.
U.S. fiscal cliff concerns have yet to scare off global investors and that itself presents a big challenge for the nation, Gordon adds.
"We are living under a safe-haven curse," he says. "It's a curse because it makes it harder for the politicians to get their act together. This safe-haven curse situation is going to be with us for at least several years."
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