Fiscal Cliff May Curb Food Budgets, Household Spending

Kids don't understand adult phrases like "fiscal cliff." What they understand is that mom says no extra milk on the cereal or no second helpings of meat at dinner.

Ayana Fakhir, 34, of Shaker Heights, Ohio, has two children under the age of 8. Even though she has a stable, well-paid job working as an attorney for the federal government, Fakhir is worried because her salary is staying the same, but her costs, including taxes and food, are rising. "It's hard for a kid because they don't understand that Mommy can't go to the grocery store every week."

"Fiscal cliff" has become a popular way to describe the economic situation facing the nation as a host of tax breaks expire and other government spending cuts begin at the end of 2012. It is expected to impact families differently, as the cuts take different-sized bites out of household budgets, but eliminating the payroll tax cut alone could result in incomes that are anywhere from $10 to $100 lower on average per month for American families.

Federal tax hikes may not amount to a huge chunk of change, but combined with increasing state and local taxes, rising health insurance costs, flat wages and -- perhaps most painfully -- the rising price of food, working middle-class Americans could be hit hard.

The end of the payroll tax cut in January "is definitely a squeeze and one we are very concerned about," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. "When you think about working class and they live paycheck-to-paycheck, something has to give. Maybe [the payroll tax break] should be phased out slower."

Marr said they have a few options: cut back on expenses, dip into savings or borrow more.

Going into debt to cover costs is not an option, said Fakhir; instead, her strategy is to cinch the belt even tighter.

"I saw myself moving toward credit cards, so I got rid of all of those," she said. "I am looking at a cheaper health care plan. I take it month by month and see what I can move and juggle, and see what I can put off."

But its just not going to be easy to feed two growing children as the price of groceries, especially dairy, produce and meat continues to rise, she said. "I don't know how I could make my dollar stretch anymore," added Fakhir, who works for the Social Security Administration.

Economists say Americans have typically offset tax increases by dipping into savings. The consumer has relied on savings to bridge the loss of disposable income from tax increases in the past, Jacob Oubina of RBC Capital Markets, told The New York Times .

Yet for some Americans, there just are no more savings to dip into anymore. Kim Rich, 44, works as a development director for a medical company in Columbia, S.C. She said her savings already have been tapped over the last four years to pay for the rising cost of food and gas along with sending her daughter to college, medical bills and a host of other state tax hikes.

Like Fakhir, Rich said borrowing more is not an option. Instead, faced with a bigger tax bill next year, Rich said she is redoubling her efforts to cut costs.

"I have no idea what the final cost this tax increase will be," she said, "but I can tell you that I currently count every penny, utilize every coupon and follow a strict budget to stretch our dollars."