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11/13/2012 4:46:00 AM
CBO: Recession looms if nation heads over the fiscal cliff
But agency says current policies causing higher debt would harm economy more

Richard Moore
Investigative Reporter

The election is behind us, and no one knows what is going to happen in Washington when it comes to the looming fiscal cliff – the series of automatic spending cuts and tax hikes scheduled to kick in at the beginning of the new year – but one thing is likely if the nation barrels over it: Recession in 2013.

That’s according to a new report by the Congressional Budget Office, which estimates that unemployment will spike to 9.1 percent if a bargain to avoid the cliff isn’t reached.

Right now a line has been drawn in the sand, and so far no one seems willing to fall back from their respective positions. President Barack Obama wants to end Bush-era tax cuts for income earners making more than $200,000 a year ($250,000 for couples); leaders in the Republican-controlled House say any tax rate increases are unacceptable.

Given that impasse, the CBO set out to look at the economic landscape should the worst case scenario happen. According to the agency’s projections, gross domestic product would drop by .5 percent in 2013 – reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. 

“That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013,” the CBO report stated. “After next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen, returning output to its potential level (reflecting a high rate of use of labor and capital) and shrinking the unemployment rate to 5.5 percent by 2018.”


If the cliff is avoided

If political leaders in Washington do find a way around the impasse, the CBO stated, output would be greater and unemployment lower in the next few years.

That said, even in that circumstance, the economy is likely to be remain sluggish for the foreseeable future, the agency estimated. 

“However, CBO expects that even if all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time,” the report stated. “Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was allowed to take place as currently set by law.”

Specifically, the CBO projected, eliminating scheduled automatic spending cuts while maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.

In addition, extending all expiring tax provisions other than the cut in the payroll tax – in other words, extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions except for the payroll tax cut – would boost real GDP by a little less than 1.5 percent by the end of 2013, the agency reported.

All totaled, the report continued, those policies would boost real GDP by about 2.25 percent by the end of 2013. 

“Thus, of the total difference in the projected growth of GDP next year under current law and under the alternative fiscal scenario, about two-thirds owes to changes in tax policies and about one-third owes to changes in spending policies,” the report stated.

Debt rise staggering

Meanwhile, in a separate report, the CBO revealed just how much the debt is rising under current policies: the federal government incurred a budget deficit of $1.1 trillion for fiscal year 2012.

That’s $207 billion less than in 2011, the agency observed, but nonetheless marked the fourth consecutive year with a deficit above $1 trillion. 

“As a share of the nation’s gross domestic product (GDP), the deficit declined – from 8.7 percent in 2011 to 7.0 percent in 2012 – but it was still the fourth highest as a share of GDP since 1946,” the CBO stated.

The decline in the deficit’s growth stemmed largely from an increase in revenues, the CBO noted. 

“Revenues rose by about 6 percent in fiscal year 2012, in part because of a significant influx of corporate income tax receipts,” the report stated. “Although the government’s receipts increased (in nominal terms) for the third consecutive year, they still were 5 percent below their peak in 2007. As a share of GDP, receipts rose from 15.4 percent in 2011 to 15.8 percent in 2012 but remained well below the 40-year average of about 18 percent of GDP.”

On the other side of the equation, outlays declined by only 1.7 percent in 2012. 

“Federal spending has totaled between $3.5 trillion and $3.6 trillion in each of the past four years, and spending in 2012 was just slightly more than in 2009,” the CBO stated. “As a share of GDP, outlays fell in 2012 – to 22.8 percent, which was less than the 24.1 percent recorded in 2011 and 2010 but still above the 40-year average of 21.0 percent.” 

Richard Moore may be reached at richardmoore.gov@gmail.com.

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