Breaking Down The Fiscal Cliff In 12 Charts

Tyler Durden's picture

Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.


The so-called ‘fiscal cliff,’ the confluence of $607 billion in expiring tax and expenditure policies set to take effect at the end of 2012, poses a significant risk to the U.S. economic outlook.


Unless lawmakers reach a compromise to extend some or all of the temporary tax cuts and postpone mandatory spending cuts, the hit to the economy would translate into about 4 percent of gross domestic product.


There will probably be little movement to address the economic consequences of the fiscal cliff until after the November U.S. presidential election. This will leave policy makers the one-month lame duck session of the 112th Congress between Nov. 13 and the currently scheduled day of adjournment on Dec. 14 to reach a decision before the scheduled tax increases and mandatory spending cuts will take effect Jan. 1.


Given political polarization, these issues may well not be addressed until the start of the 113th Congress on Jan. 3, 2013.


Growth And Austerity: This is not the first experience that the federal government has had with periods of austerity. During the Reagan, George Herbert Walker Bush and Clinton administrations, periods of bi-partisan fiscal restraint were seen. Solid growth in the Reagan and Clinton eras contrast with slower growth and an eventual slide into recession during Bush the elder administrations. The major difference between those eras and our current period is historically slow growth occurring at the same time as high political polarization. These conditions are not conducive to a grand bargain to put the nation’s fiscal path on a more sustainable footing and avoid a likely recession in 2013.


The burden of adjustment caused by the significant fiscal restraint that would take place next year would be spread around the public and private sector. The end of emergency unemployment benefits alone accounts for $40 billion in reduced government spending. The Congressional Budget Office estimates that each dollar of unemployment insurance generates $1.55 in additional economic activity.


Defense Spending: automatic sequestration may result in about $55 billion in defense and non-defense accounts from the Pentagon that account for roughly half of the $110 billion resulting from the Budget Control Act of 2011. Based on current statutes, only a new law that terminates automatic defense cuts can prevent sequestration. One result of major cuts in defense spending would likely be the loss of tens of thousands of defense contractor-related jobs. Many of these jobs are held by middle and upper middle class income earners critical to supporting current levels of household spending.


Taxes & Spending

The policies that put the fiscal path on a sustainable footing will likely involve a mixture of spending cuts and tax increases over the next decade or two. In any debate, the most contentious portion of it will revolve around how the burden of adjustment is distributed throughout the economy while supporting growth and reducing unemployment.

Marginal Rates Pre- and Post-Cliff: The sunset of the Bush tax cuts and the expiration of the Obama tax holiday, as well as a variety of tax hikes and spending cuts, will boost marginal tax rates across the board, collapsing the six tax brackets into five. Using a conservative multiplier, the end of the $220 billion Bush tax cuts would result in a reduction in consumer spending of roughly $200 billion or 1.3 percent of GDP. The end of the Obama tax holiday would produce a $95 billion hit to household spending, subtracting 0.6 percent from GDP.

Increased taxes on corporations may not be a good way to encourage growth. While taxes on individuals have come down substantially over the past 30 years, that is not the case when it comes to U.S. statutory corporate tax rates. The 2012 combined government corporate tax rate in the U.S. is 39 percent, trailed by Japan at 38 percent, France at 34.4 percent and Germany at 30.2 percent.


Federal Government Revenues and Outlays: Debt-to-GDP levels will need to be stabilized at near 100 percent, whether through a decline in outlays, by finding ways to increase revenues without slowing growth, or some combination of the two. Based on the most recent CBO study, tax receipts are projected to increase 41 percent between 2011 and 2017, while a 21 percent rise in spending is forecast.

Discretionary Spending: Without a consensus among lawmakers on how to reform entitlement spending or enact comprehensive tax reform, discretionary spending will bear roughly half the burden of the automatic sequestration set to take place due to the Budget Control Act of 2011.

Politics And Policy

The fiscal cliff is set to occur within 60 days of what is shaping up to be a rancorous national election. Given the depth of the ‘Great Recession’ and measures taken to prevent it from becoming a depression, the importance of politics and policy has increased in relevance for investors.

Competing Visions: Fundamental policy disagreements among politicians regarding the size and scope of government is the primary cause behind the unusual confluence of so many tax and spending items coming to a head at one time. Using the CBO’s baseline forecast as a benchmark, federal spending as a percentage of GDP is likely to increase from 24.1 percent in 2011 to 24.4 in 2022.


Investors Troubled by Policy Uncertainty: Investors and some economists have pointed to a lack of clarity regarding the future path of taxes to support current levels of public expenditures, and the impact of stepped-up regulatory activity on overall business conditions. An index of policy uncertainty and its impact on output, investment and employment developed at Stanford University and the University of Chicago indicates a clear lack of direction in addressing persistent deficits. The level of debt likely foreshadows slower growth and subdued employment conditions ahead.

33 Senate Seats in Play: Based on an estimate by Roll Call magazine, of the 33 seats up for grabs, seven are at risk during the upcoming election, six held by Democrats and one held by Republicans. Presently, the Senate is comprised of 51 Democrats, 47 Republicans and two Independents.


28 House Seats in Play: Roll Call indicates that there are 28 House races that currently rate as a toss-up. There are two open seats and one new seat in Arizona’s 9th district due to the shift in population that has seen Congressional seats migrate from the northeast to the south and west. Presently the House is comprised of 192 Democrats, 240 Republicans and three vacancies.


"If the fiscal cliff isn’t addressed, as I’ve said, I don’t think our tools are strong enough to offset the effects of a major fiscal shock, so we’d have to think about what to do in that contingency.”

— Ben S. Bernanke, Federal Reserve chairman

Source: Bloomberg Briefs

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devo's picture

Bullish for Ojibwa bird traps.

GetZeeGold's picture



How much gold do they cost?


devo's picture

Zero, you can go into the woods and build one for free. They catch a mean quail.

GetZeeGold's picture



What the hell do you do with a mean quail?


GetZeeGold's picture



Ya got nuts Pasco.....I gotta give you that.


BKbroiler's picture

Devo's been reading the US Army Survival Manual a bit much...

LULZBank's picture

Put it through a 3D printer and start a mean Quail farm.

mkucstars's picture

Wrap it in bacon and bake it...

yrbmegr's picture

Deficits are bad, but the alternative is worse.

LawsofPhysics's picture

If the alternative is default and real consequences for bad behavior at ALL levels of society, you are incorrect.  Clear the bad debt already.  Nature and the laws of physics will insure the return of "consequences" either way.  Anyone ready for an actual adult conversation yet?  Nothing changes as long as the moral hazard remains.

forwardho's picture

Laws, Weather or not we want an "adult coversation" makes no differance. The pain of reallity will not allow most to see the truth in what you say. We will soon be 'forced' into that scary, scary place,

Thisson's picture

There's nothing "scary" about living within your means. 

yogibear's picture

In the end Roth IRAs and 401Ks can be raided to pay off the debt. Other countries have done this. Say 30% is instantly theirs.

SilverRhino's picture

30%?   Hell why not 50%?

There are over 3 trillion dollars in nice liquid 401K accounts suitable for mandatory Treasury holding swaps.  Oh and 4 trillion dollars in IRA accounts. 

Damn, that would be the way to do it.   Congress mandates a minimum level of UST's for continued 401K / IRA exemptions.   POOF that's anywhere from 1-7 trillion dollars recovered into their hands. 

Or even better, the Fed just provides the UST notes on it's balance sheet for the swaps, and then the Federal Reserve has a huge reduction in balances and looks like a much more viable method for continuing the ponzi.  


Even more thoughts : All retirement plans are at $17 trillion .... that's a shitload of potential looting opportunities. 

Thisson's picture

Yeah but even taking it all won't stop the inevitable.  We have to live within our means as a country, and we will be forced to do so at some point.

LawsofPhysics's picture

How's that eCONomy gonna run again when no one has any purchasing power or even fiat for that matter?  Long guillotines and black markets (hey, at least they will be "free" of government regulation).

Spastica Rex's picture

Drop unemployed people out of airplanes.

GetZeeGold's picture



That's cheating....make them walk off the cliff like everyone else.


Snakeeyes's picture

Even if the Bush tax cuts are extended for one year, Obamacare taxes are HUGE! Look here!

Also, lower income Americans were lied to about no tax increase for them. How about a 50% increase for taxpayers in the 10% bracket, rising to 15%!

CunnyFunt's picture

Right, Bernie Sanders is an "independent". He just represents a state where it's acceptable to describe oneself as a socialist.

GetZeeGold's picture



Excuse me sir.....that cat's a freakin commie.


CunnyFunt's picture

He went to the same school as Chuckie Schumer, too.

azzhatter's picture

Best thing that could happen to America- fiscal cliff. Force people to make decisions that they are too weak to make on their own

wagthetails's picture

I completely  agree, for 2 reasons.  #1) we need to cut spends and raise revenue, this will indeed be painful but there are no easy choices left and #2) the super committee and congress need to feel the backlash from their failure.  the fact the cliff is comign is because they were unable to agree on how to cut/raise taxes.  I just hope the pain of the cliff drives anger at congress. 

But there are no sunshines and rainbows...we can get through this, but it is going to be hard fo the next 10 years.  Otherise, we keep printing and just make the eventual collpse even more catastrophic. 

Cole Younger's picture

The U.S. lost a good revenue stream when it opted  to kill U.S. manufacturing in favor of free trade. All they did was transfer government revenue to private corporation. Either you cut government spending on social programs and discretionary spending or you tax the shit out of U.S. corporation to regenerate the loss in income to balance out the governments loss in revenue. Free trade isn't free. It comes at a cost...

Things that go bump's picture

You are thinking about this all wrong.  I pray for total collapse because in the convulsions following such a thing, in the rage of disappointment and vengence taking, when people see their children hungry and realize they have been betrayed, if it is bad enough, maybe we can finally rid ourselves of those leaches who call themselves our government.  This is the best opportunity the people have had in over 100 years to shake off our chains.  

Thisson's picture

We don't need to increase revenue - we have plenty of revenue already.  The problem is a spending and waste problem.  The american worker would be globally competitive without all of the taxes and rents burdening him (her) down.

kaa1016's picture

I agree. I call the fiscal cliff the great compromise. Repubs want to cut spending and the Dems want to raise tax. Done deal without anyone having to vote on anything.

Stuck on Zero's picture

The biggest joke is that chart showing Federal spending as a percentage of GDP.  The GDP number is a farce.  A far more important number is spendable income of Americans vs. government spending.  Spendable income means income after taxes and mandated spending.  That number is about 50-50.  The Federal government spends as much as the take-home incomes of all Americans.


toomanyfakeconservatives's picture

I love it! Between the cliff and the looming MASS ARRESTS a lot of heads are going to roll...


I can already see the images of paddy wagons and prison buses pulling up to the White House, Capitol Hill, and FED Headquarters.

gojam's picture

Is that a disputed election re 2000 I see on the horizon or is it a black swan ?

BandGap's picture

Is the 4% hit to the GDP in actual terms or relative terms? Actual term means if we are at 2% now, it's headed for -2% later. The relative term has much less impact.

And someone help me out with the math where $1 in unemployment benefits results in $1.55 of financial activity? This violates the second law of thermodynamics. If this is true, we should all go on unemployment to kick start the fucking economy.

Fucking bizarro world.


gojam's picture

Right on both accounts. :-)

According to their own graph projection the actual fall relative to where it would otherwise be is nearer 8%.

forwardho's picture

BG, Since it takes about $3.75 of taxes to pay out that $1.00... I think we could count that as a net loss.

newworldorder's picture

The path of least resistance for all, is for Congress to continue borrowing on its current path. Lots of arguing to stake out positions, some minor "cuts" but no major changes.

Diesel Seven's picture

Bernank better start thinking of his contingencies--the FOMC might need to telegraph future purchases of SPY--gotta give the wealth effect a boost. Better yet, start buying GO muni bonds (but only those graded C or better). Best idea, start printing fiat to build up US gold reserves--psycho idea, yes, but that would really help ME in my long gold positions.

On the fiscal side, repeal Medicare and Obamacare and give eveyrone an iPhone 5 with a preloaded WebMD app along with a JNJ first-aid kit ($9.97 at Walmart). That'll lower spending and boost the wealth of Apple, JNJ, their suppliers and shareholders. Doctors would migrate from clinics and hospitals to staff medical service call centers, which we could in turn outsource to India once no one was looking. See, all it takes is a little creativity (in lieu of intelligence) to solve all of our woes.

Oops, forgot one last thing on taxes . . . allow families with household income under $1 billion to claim exemptions for each pet they have (including fish an birds--we won't discriminate)-- with a cap of $900 million ($800 million for singles). I know what you are saying . . . what about the lost revenue? Yes, this would have a somewhat significant effect on near-term net tax receipts, but the long-term economic savings from animal control expenditures will pay (over the next 85 years) for the lost tax revenue for 2013. (OK, done being silly, gotta get to work)

Bruce Krasting's picture

These big numbers are always confusing. Especially if they are incorrect. The first BB slide has the consequence of the end of the 2% Payroll rax reduction at $95B. That is the wrong number for full year 2013. The end of this tax cut will cost close to $115B.

2011 PR deduction = 102.506Bn

August/2011 - July/2012 (latest 12 month data) = 111.550Bn

2013 =>112Bn

Does it matter if the BB estimate is off by $20Bn? Not really. But if all these other numbers have a 20% error rate, it would be a big deal indeed.

Thisson's picture

You've lost the forest for the trees.  It makes NO DIFFERENCE what the specific numbers are.  We are Greece (or Japan, take your pick) no matter which set of numbers are used.

spooz's picture

Per Bloomberg Brief:

"First, firms are already paring back investmentand hiring, and households have stepped up their rate of savings, most likely to smooth out consumption to account for reduced after-tax income next year, and thereby contributing to the current slow pace of growth."

I don't know of anybody who is stepping up their savings or paring back hiring because they are afraid of taxes.  So it has nothing to do with deleveraging and lack of confidence in our fake capital markets, ZIRP, or the fear of the future based on Bernanke going all in?  I think Bloomberg most likely has it wrong there.

Then there are the two charts you missed, on the last page, that show "Bills that Gave Rise to the Fiscal Cliff".  Seems like lowering taxes in 2001 and 2003 helped give rise to the fiscal cliff, but then on the "Bills introduced to reverse fiscal cliff factors" by the current congress are extensions of the tax cuts?  So somehow the effect of tax cuts both gives rise to and is supposed to reverse the deficit? How does that work?

Seems to me we are trying to figure out who pays for the mistakes of the last 20 years, including two pointless wars and low tax rates that allowed wealth and income disparity to grow and created economic royalists.

Schmuck Raker's picture

Every year, as the mountain of debt grows higher, the fiscal cliff presents a much more lethal fall.

The debt is NOT sustainable, so fiscal "adjustment" is inevitable.

The sooner we jump off the cliff, the better - broken bones, and internal bleeding are preferable to certain death.

TimmyM's picture

So I guess Wall Street is still all caught up in measuring phantom real GDP. Was there something in this analysis about a strong dollar, cheap oil and cheap food from the "fiscal cliff"?

Seems like a political diversion from the true relevant discussion of the longterm standard of living.

barroter's picture


That'll sell well to the masses. 

Thisson's picture

We don't need any austerity.  Austerity is for bankers.  We need to eliminate debt and then have a balanced budget going forward.  That means a real adult conversation has to take place.

Ham-bone's picture

Seems what is lost here is that we need $1.3T deficit to achieve a projected 1.9% growth in GDP...or a $500B deficit results in a -2.2% GDP.  Isn't that the classic death spiral? 

Seems the blueprint for the "resolution" to this issue already exists...Republicans will extend tax breaks, loopholes, corporate giveaways for their constituents and Dems will extend tax breaks and entitlement programs for their constituents.  Claim this will all be paid for starting, in, oh say, 2017...Congress' work is done.  Tax and policy uncertainty made certain!  There will be deficits.

Thisson's picture

Reality will assert itself eventually because there is resistance embedded into the system.  Continued overspending will result in either a bond-market revolt, or a common revolt as the currency depreciates.

MetalFillBoy's picture

It seems to me that Congress will go all Republican, and Obama will be re elected, in Nov.  At that point, both sides can blame the other, and they will let it go off the cliff.  The next election is 2 years off.  By that time, the impact will be gone (most of it), and the voting population will have forgotten.


But both sides will get what they want: Dems get higher taxes, and the Rep get cuts to social programs, and both can blame each other and still get re elected in 2 years. Win-win, from a political point of view.


 . . . Or I could be wrong! :)



Radical Marijuana's picture

All of these economic worries remind me of the chapter in Catch 22, where first aid is being applied to a thigh wound, until the point where the individual with that thigh wound being bandaged slumps over, and all his guts spill out of a huge wound in his back.

As we rush towards a world war going out of control, the American fiscal cliff is in a race with that insane WAR, triggering genocides, and democidal martial law ... Obviously, the fiscal cliff is like the thigh wound, that we need to stop bleeding, before it kills us. However, the bigger wound in our back has already probably been fatal.

The fiscal cliff ONLY matters, as a priority, IF there is NOT an out of control world war and martial law situation first ... I envy those who still believe that the fiscal cliff problems matter! I WISH that I did not believe we are already mortally wounded, by everything and everybody who is driving us towards genocidal wars, and democidal martial law, long before the grinding economic collapse finally adds up to something that matters, compared to those.

I have reached the conclusion that we are already dead, but we just do not know that quite yet. After all, that is the way one dies from acute radiation poisoning. Nothing happens when one is actually killed, it just takes a little while longer for the effects to fully manifest. Long long ago, I had an economics professor say, "plug an atomic war into your market analysis, and then what do you get?" ... You get that the market, and the entire economy that used to be, no longer matters! ... However, since there is nothing we can actually do about that, we just have to go on living one day at a time, and maybe pretend that if we bandage the serious thigh wound up properly, then we will survive.

Writing this is just a pathetic kind of psychological therapy, which no longer works as well as it used to, when I still believed that there may be some last minute political miracles, that might make a difference. Unless something totally outside of the known material history of human beings happens, then an insane world war will get started, and almost nothing that matters to us now will still matter afterwards.

A lot of the way I feel was expressed in this article, which resonates with the Zero Hedge article about how most Americans are watching entertaining television, while they do not know, and do not want to know, about anything else!

World War 3 Conditioning in La La Land