The budget debate that has flared off and on for several years is going to get much hotter in the next several weeks. At issue is the fiscal cliff, the combination of higher taxes and spending cuts that is part of current law and set to begin in January 2013. The three key components for clients to understand are the deficit, the economy, and the timeline of coming events.

The deficit
The financial crisis of 2008/2009 and related recession triggered a wave of deficit spending. Some of the spending was directed at unemployment benefits, food stamps, and welfare payments as the jobless rolls surged. Other outlays included attempts to jumpstart the economy through stimulus spending and aid to states. However well intentioned, the trajectory of deficit spending is clearly unsustainable and must be addressed before the United States goes the way of Greece and Spain.

The fiscal cliff’s combination of higher taxes and reduced spending was supposed to be Plan B in case the budget Super Committee (remember them?) failed to produce a Plan A. Neither political party is happy with it, but compromise has so far been elusive.

The economy
Addressing the deficit would be a much simpler matter if the economy were stronger. Administering too much budgetary medicine at this juncture, many fear, would only exacerbate the problem by slowing growth, increasing unemployment, and curtailing tax revenues. The economies of southern Europe offer a vivid example of how messy austerity can be.

The timeline
The key events in the countdown the fiscal cliff begin with the November 6 election, because the two parties disagree about what role taxes should play in reducing the deficit. Because the election will also decide which party controls the Senate, it will also provide a clue to whether compromise legislation can be struck during the “lame duck” session.

Next steps:
1. Check out Putnam’s latest infographic, which outlines two possible post-election scenarios and provides further detail on what is at stake.
2. Download Putnam’s “Ten income and estate planning strategies for 2012” to review potential planning ideas for your clients.
3. Join me and Chris Hennessey on November 7 after market close for an in-depth conference call to discuss strategies to implement before year-end.

Date: November 7
Time: 4:15 p.m. Eastern Time
Dial-in: 888-455-0337
Passcode: putnam