CBO warns US ‘could fall off fiscal cliff’

Washington, D.C., United States (4E) – The Congressional Budget Office is warning the United States could fall off a “fiscal cliff” because of tax increases and spending cuts scheduled to take effect at the end of 2012.

CBO officials note in their report that observers have dubbed a series of measures set to begin in January that remove $500 billion from the economy in 2013 a “fiscal cliff.” Falling off that fiscal cliff will harm the economy and likely send it back into recession, the CBO said.

Those measures include the expiration of the Bush tax cuts and protection of the middle class from the Alternative Minimum Tax, the beginning of $1 trillion in spending cuts, and a reduction in compensation for Medicare doctors.

The CBO says that if Congress allows all those policies to take effect that it projects that the economy would contract by 1.3 percent in the first half of the year and grow by 2.3 percent in the second half for an inflation-adjusted growth of a mere 0.5 percent overall for 2013 .

On the other hand, the economy would likely grow if Congress changes course, the CBO said in its report.

“If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law,” the CBO wrote.

It added a caveat.

“However, eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. If all current policies were extended for a prolonged period, federal debt held by the public would rise much faster than GDP, a path that could not be sustained indefinitely,” according to the CBO.

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