Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

What is this fiscal cliff all about?
Mon, 19 Nov Pre-Open

Before understanding the term fiscal cliff let us first try and understand what fiscal gap actually means. We know that government policies with regards to spending and taxation are known as fiscal policies. Fiscal gap arises whenever the income of the government that comes from taxation and other revenue receipts is less than the expenditure. Expenditure of government typically relates to defense spend, healthcare spend and subsidies, if any. Thus, a fiscal gap is a worry for any government as expenditure rises but there is no income to fund the same.

Right now, the US government is facing a huge fiscal deficit. If the government takes measures to overcome the same it may send a shock to the US economy. Basically, this catch 22 situation which the US economy is currently facing is known as fiscal cliff. Let us understand it in a bit more detail.

In order to eliminate the fiscal gap government will have to increase taxes and reduce spending. This would mean that various tax breaks that were available until now will vanish. It is believed that approximately 90% of the Americans will see their taxes rise. Government spending will also be slashed. That would mean some of the government benefits available until now will go away. These steps would reduce the deficit but affect growth. But this may also end up endangering the US economy.

However, if the government does not take any steps to curb the deficit its debt would grow. That's because it will not have sufficient income to fund the expenditure. So, it will have to borrow. However, excessive borrowing will put its sovereign rating at risk. It may also fall in a debt trap like Europe. Thus, the US is basically in catch 22 situation now. It is in a soup whether or not it takes steps to curb the deficit. But how did it land here?

It may be noted that in August 2011, the budget control act was passed in US. That raised the nation's debt limit, provided various tax breaks and other benefits to temporarily boost the economy. But these laws had a timeline attached to it during which none of them have yielded any material results. So, now they have to be rolled back. Or else the sovereign rating of US could come under threat. It seems that the US economy is in a complete cliff hanger. Only time will tell whether it can come out of this fiscal mess.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "What is this fiscal cliff all about?". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 22, 2018 09:25 AM