Congress and President Barack Obama have prevented a potential recession with the "fiscal cliff" bill, but in doing so put off, yet again, many difficult decisions necessary to get the nation's fiscal house in order. In a couple of months, three more fiscal cliff battles lie ahead -- sequestration, the debt ceiling, and a new federal budget.
As part of the Budget Control Act (2011), about $1 trillion of automatic spending cuts were supposed to begin going into effect in 2013 if Congress did not replace them with an equivalent amount of deficit reduction. About half of those cuts are in defense and the other half are in other discretionary spending.
The cuts, known as sequestration, were intended to provide the incentive for the bipartisan "supercommittee," also created by the BCA, to complete its task of creating a deficit reduction bill. The supercommittee was supposed to replace the sequester with long term deficit reduction through tax reform and entitlement reform. The supercommittee, though, failed to reach an agreement.
The fiscal cliff bill, officially called the "American Taxpayer Relief Act of 2012," will delay the sequester for two more months. This means that Congress will have two months to agree to a long term deficit reduction plan to replace the sequester, or the cuts will begin about the same time as ...
The Debt Limit
The U.S. Treasury already surpassed its debt limit on Monday. Treasury Secretary Timothy Geithner announced that he will use "extraordinary measures" that will allow the government to pay its bills for about two months. After that, if Congress does not increase the limit at which the Treasury is allowed to borrow money, the U.S. government will begin defaulting on promised payments.
Republicans have said they will not vote for a debt limit increase without spending cuts equal to or greater than the amount of the increase. It was this position that led to a showdown in the summer of 2011, the last time the debt limit was increased. That battle resulted in the creation of Budget Control Act.
In July 2011, Speaker of the House John Boehner and President Barack Obama came close to agreeing to a "grand bargain" deficit reduction package that would have included tax reform and entitlement reform.
In order to bring some stability to the federal budget and the financial markets, Congress and Obama still need a grand bargain agreement. They will have just a couple of months to do that before the sequestration begins and the debt limit is reached. About the same time, though, there will also be a fight over ...
The Federal Budget
Congress never passed a FY 2013 budget. The federal government has been operating under a six month continuing resolution that will expire at the end of March. At the same time that Congress will need to agree to funding for the government for the rest of 2013, it will also begin working on the FY 2014 budget, which will begin in October.
President Obama will begin the process for the 2014 budget by submitting his budget to Congress. That budget is due the first week of February, but his office has already announced that, due to the fiscal cliff, his administration will be unable to meet that deadline.