The "fiscal cliff" explained

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Congress is coming back to town after a month-long election-related break and the most contentious issues of the last four years - jobs, taxes and the economy - are set to return as well-with a vengeance. Finding a solution to avoid the "fiscal cliff" - the scheduled tax increases and spending cuts set to go into effect in January - will be the top priority of congressional leaders and President Obama in the lame duck session that will likely go all the way to Christmas.

Lawmakers agree that the economy is slowly heading in the right direction, though they disagree over whether things could have been even better by now. The unemployment rate is finally under eight percent, home prices are going up and consumers feel confident enough to spend more money.

Those improvements, however, could be wiped out if Congress fails to reach an agreement on the "fiscal cliff." The non-partisan Congressional Budget Office warns that allowing current tax rates to expire and billions of dollars in looming spending cuts to go into effect could launch the economy back into recession early next year.

Despite the consequences, there has been little effort among Democrats and Republicans to sit down together to find an alternate path with both sides waiting to see if the 2012 elections would give them a stronger hand in negotiations before accepting any compromises.

With the elections doing nothing to change the balance of power in Washington, Congressional leaders and the president are quickly running out of time to reach an agreement on the tax and spending issues that have bitterly divided them for the past two years.

It will be seen if lawmakers can finally move beyond the gridlock that has characterized this Congress, and set a more productive tone for next year, as they work on the following issues that make up the "fiscal cliff" over the next fifty-three days.

Sequester

As part of a deal brokered between Mr. Obama and congressional Republicans to raise the debt ceiling over a year ago, they agreed to $1 trillion in spending cuts that would start to go into effect in January 2013. The massive cuts would be slashed equally from defense and non-defense programs over the next 10 years with only Social Security and Medicaid exempt. Medicare benefit cuts would be limited to 2 percent.

The idea, according to members and aides at the time, was to make the cuts so onerous that it would force appointed House and Senate members of a bipartisan "supercommittee" to find a more reasonable way to achieve the same amount of deficit reduction.

But the polarization and gridlock that's infected the current Congress seeped into the supercommittee's work as well. Their months of negotiations resulted in absolutely nothing unless you count more acrimony.

The defense cuts, according to the nonpartisan Congressional Budget Office (CBO), would have the biggest impact on the economy. They estimate that preventing defense cuts set for the next two years alone would save 40,000 jobs. Republicans also argue that the cuts would be disastrous to the nation's military, especially considering the country is still at war.

Overall, the White House lists more than 1,200 government programs that would be subject to the sequester. And they warn that the cuts will compromise the country's food safety since the number of food inspectors would go down, its ability to respond to natural disasters since FEMA would be subject to cuts and it responsibility to ensure airline safety since the FAA's budget would also shrink.

  • Jill Jackson On Twitter»

    Jill Jackson is a CBS News senior political producer.

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