The Congressional Budget Office is out with an analysis of what happens if we hit the proverbial “fiscal cliff” at the end of the year — when more than $600 billion in tax and spending provisions potentially change.
It’s not pretty, and the CBO thinks it will lead to another recession in 2013 if the cuts actually happen. Most economists think it won’t.
The abstract: The U.S. is scheduled to undergo an unprecedented change in economic policy at the beginning of next year. There are scheduled increases in taxes — the Bush tax cuts will expire — and scheduled reductions in spending, which is where we get the so-called “fiscal cliff.”
Here’s the CBO’s analysis of what will happen to the American economy under those conditions: 0.5 per cent GDP growth in 2013, economic contraction of 1.3 per cent in the first half of the year and growth of 2.3 per cent in the second half.
Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.
If Congress acts and removes all policies that would lead to the fiscal cliff, CBO projects GDP growth of about 4.4 per cent.
The CBO does caution, however: GDP growth cannot be sustained in future years with the current rate of subsequent growth in federal debt.
Here’s a look at how the CBO sees growth under the current policy, if lawmakers remove the fiscal restraint and under the CBO’s alternative fiscal scenario:
UPDATE: Here’s a statement from Chris Van Hollen (D-Md.), a ranking member on the House Budget Committee:
“CBO’s report paints an extraordinarily clear and dire picture of what might happen to the economy and working families if Congress fails to act: a possible recession early next year and millions more put out of work. At the same time, CBO observes that simply extending all of our current tax and spending policies will produce unsustainable deficits and debt, which will also send the economy into decline. It is clear that we need to act and we must do so in a balanced way. That is why Democrats support the extension of tax cuts only for the middle class, choosing to reduce the deficit in a way that includes spending cuts as well as cuts to tax breaks for special interests, and replacing the meat-ax approach of the Budget Control Act sequester with a balanced plan.”
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