If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content

Video transcript

There's been a lot of talk lately about the fiscal cliff, which sounds very dramatic. And what I want to do in this video is at least lay out the numbers so that we're all on the same page. And then the next few videos, think about the implications or how the negotiations between the president and Congress might actually work out. So the first thing to frame this conversation is just where the budget is right now. And so let me draw a little graph. So let me make this axis right over here represent our budget. I want to make it as big as possible so that we can get a little bit of granular detail on how much the budget might move based on how the negotiations work out. So let's say that this line is roughly $4 trillion long. So that's $4 trillion, and halfway would be about $2 trillion. And then in between two and four, you've got $3 trillion. And then $1 trillion would be right over here, $1 trillion. And then I'm going to do some bar charts to show the different scenarios. And as I do this, keep in mind the size of the US economy. The US economy is approximately $15.5 trillion. So that is roughly our GDP, depends on which year you're measuring. But that gives us at least a frame of reference for what chunk of GDP we are talking about when we talk about the federal budget. So let's start with the 2012. Let's start with the 2012 budget. So in 2012, the US government is spending $3.6 trillion. So let me make my graph a little bit more granular. So this would be 3.5. So 3.6 is going to be right around here. So let me draw that. And I'll do it in this purple color for the expenditures. So this is how much the federal government spent or I guess is spending in 2012. So just like that. All right, there we go. So that's expenditures. Now you are probably aware that we don't have all of the revenue. We didn't bring in the $3.6 trillion in taxes. So this right over here is $3.6 trillion. Our revenue that we get through tax revenue and other things is somewhat less. It, in 2012, was on the order of $2.5 trillion. So I'll draw that right over here. So $2.5 trillion. I'll do it in this green color. So this is how much revenue was brought in. So let me write this down. This is $2.5 trillion. Now let's think about how much might get spent under the different scenarios. So first I'll lay out a rough approximation of Obama's budget proposal for 2013. So Obama in 2013. So on the spending side, he sees, or he would like to see, spending go up by $200 billion. So let's see this. So on the spending side, we're going to add $200 billion. And the next few videos, we could talk about the pros and cons, the arguments for and against something like that. So let me draw that. So relative to the 3.6, we're now that 3.8. So you have a spending increase of-- so plus $200 billion. That gets us to 3.8 billion in total expenditures. If my best estimate of what the Republicans in Congress would want. So let's write. Let's say, a Republicans in 2013 is that they would actually ideally want spending cuts from these levels. So let's draw that out. And roughly on the order of about $100 billion. So roughly on the order of $100 billion. They might even want more than that, but let's just go with that for now. So that gets us to a budget of $3.5 trillion. That's about that right over there. $3.5 trillion. So once again, relative to 2012, you're going down by $100 billion. Let me make clear. You're subtracting $100 billion. Now in the fiscal cliff scenario, the spending will be similar to the Republican ideal right over here. So let me write this over here. Fiscal cliff. We are also spending. We are cutting on the order of $100 billion in government expenditures. So let's draw that. So at least on the expenditure side. And these are all very rough. I'm sure the Republicans who would agree and disagree with this. But I'm trying to get my best sense of kind of an aggregate view on things. So the fiscal cliff. We are also cutting spending by $100 billion. Now let's go to the revenue side of things. In all of these scenarios for 2013, and just to be clear, the fiscal cliff that's also for 2013. And all of these scenarios, we get the same revenue that we got in 2012. So let me draw that. Plus we get about another $100 billion from the growth in the economy. As the economy grows, and even if your tax rates are held completely constant, you're going to get more revenue for the federal government. You get about $100 billion from the federal government. And so that gets us to $2.6 trillion without changing anything. So let me just shade all of these in really fast. So shade that one in. Shade that one in. And then, shade that one in. Now, as you've probably heard on the news, Obama would like to extend the Bush tax cuts for the middle class. And he considers a middle class of those who are making less than $250,000 for a family. But he would like to not extend the Bush tax cuts on the rich. And he would like to actually include a few other tax increases, also on the wealthy. And so you would get an increase of revenue under Obama's plan of $300 billion. This is once again, very rough. Probably $50, $60 billion that I'm not fully accounting for, but it'll give you the rough picture. So this is $300 billion. And what Obama's doing here, or what at least in the proposal, as far as I can believe, none of this is that simple. What they're talking about right over here is extend tax cuts for middle class, which my best reading, seems like we would lose a little under $200 billion of revenue. But then we keep the tax cuts or we let the tax cuts on the wealthy expire. So that gets us 200 of this. And then there are other tax increases and another removing loopholes and whatever else they increase this to $300 billion. So let's compare the deficit. So this gets us to, in the Obama scenario, we end up with $2.9 trillion in revenue. So let's compare what the deficit did from 2012 to Obama's budget plan. So in 2012, if you take $3.6 trillion, subtract out $2.5 trillion, there is a gap $1.1 trillion. This is the deficit. This is how much the government has to borrow in 2012. Under Obama's budget, what would it be for 2013? Well we're spending $3.8 trillion. We are getting a $2.9 trillion. So you have a gap of $900 billion. So there is some of the deficit reduction, although the deficit is still quite large. The deficit reduction is $200 billion. $100 billion of that came from the economic growth. And then, the rest is coming from, or a good chunk of that, is coming from increased taxes. Depending on how you view it, either increase taxes on the wealthy or not letting the tax cuts expire on the wealthy. Now let's think about the Republican situation. Well, you have $2.6 trillion in revenue. And you have $3.5 trillion. Let me write this down. And once again, you have on the order of a $900 billion gap. So in terms of deficit reduction, these things look pretty similar. You have a very similar deficit. Obama is increasing spending. And he would argue that he's investing in things that might help stimulate the economy, or invest in America for the future. And then he's making it up by letting the tax cuts on the wealthy expire for the most part. The Republicans want to cut spending. But they're also letting the tax cuts continue. So you essentially have the same level of deficit reduction. Now I think we are ready to talk about the fiscal cliff. The fiscal cliff, we're spending hundreds billion less. And then we are also letting all of the tax cuts for both the wealthy, those who are earning at a family level more than 250,000. And for the middle class, we're letting them all expire. And so you have the revenue increase by $400 billion. So this goes up by $400 billion. And so that takes us roughly, once again, this is all rough, to about $3 trillion in revenue and $3.5 trillion in expenses. And so your deficit, under the fiscal cliff scenario, the deficit is going to be $500 billion. Now you might say, hey, this is great. Everyone talks about the deficit. The deficit is a scary thing. We are borrowing from the future and all that. Why are people so afraid of the fiscal cliff? The reality is that if you take $500 billion out of the economy. So $100 billion through spending cuts and then $400 billion from tax increases. So the government is deleveraging. But that money's being sucked out of the economy. And you could argue that there's just kind of a multiplier effect as well, that might endanger what's already a very precarious risk of recovery. That the recovery is really just starting to happen. And if we were to suck all of this money out of the economy, that's what the argument would be, then that might throw us into another recession. Or that might make the recovery that much weaker. In the next few videos, we'll discuss that in a little bit more depth. See what people are saying the impact might be. And what the arguments might be in either case.