These laws include tax increases due to the expiration of the so-called Bush tax cuts and across-the-board spending cuts under the Budget Control Act of 2011.The year-over-year changes for fiscal years 2012–2013 include a 19.63% increase in tax revenue and 0.25% reduction in spending.
Some major domestic programs, like Social Security, federal pensions and veterans' benefits, are exempted from the spending cuts. Spending for federal agencies and cabinet departments, including defense, would be reduced through across-the-board cuts (referred to as budget sequestration).The Congressional Budget Office reported an increased risk of recession during 2013 if the deficit is reduced suddenly, while indicating that lower deficits and debt over time improve long-term economic growth prospects.
The deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion or about 70%.The Budget Control Act of 2011 was passed under the political environment of a partisan stalemate, in which Democrats and Republicans could not agree on how to reduce the deficit. It was thought that the blunt cuts of budget sequestration and sharp revenue increases would be mutually undesirable to both parties and provide an impetus and deadline to bring the sides together to solve the deficit problem.
The projected effects of these changes have led to calls both inside and outside of Congress to extend some or all of the tax cuts, and to replace the across-the-board reductions with more targeted cutbacks. It has been speculated that any change is unlikely to come until the period roughly between the 2012 federal elections and the end of the year. Additionally, the debate may be exacerbated by the expectation that the debt ceiling is expected to be reached before the end of 2012,[note 1]unless "extraordinary measures" are used.
Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the 2010 Tax Relief Act or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes and/or increasing spending.