What Is the Fiscal Cliff?

Without timely action from Congress, the United States faces a drastic set of tax hikes and spending cuts at year’s end that could derail the nation’s fragile recovery and spill over into the global economy. The budget measures, known collectively as the “fiscal cliff,” would automatically slash the federal deficit by $503 billion between FY 2012 and FY 2013, according to the Congressional Budget Office. In addition, Treasury is likely to reach its capacity to borrow—the federal debt ceiling—early next year.

Analysts say the coming weeks offer Republicans and Democrats yet another opportunity to strike a balance between the short-term measures needed to feed the recovery and the medium to long-term policies that will stabilize and eventually lower the debt. Still, many question the likelihood of a bargain in the lame duck session of Congress or the early days of 2013.

This Renewing America Backgrounder examines the domestic and global implications of the coming fiscal showdown.