The so-called Fiscal Cliff is a double-edged sword, the non-partisan Congressional Budget Office says in a new report issued today.
Why? Ignoring the huge tax increases and spending cuts set to take effect at the beginning of the year, “will probably cause the economy to fall back into a recession.”
But: “They will make the economy stronger later in the decade and beyond.”
The Fiscal Cliff, by the way, is a self-inflicted wound. It represents a confluence of events that have been set up by Washington’s inability to come up with a “grand bargain.” The Bush tax cuts for example, have been extended piece-meal and they are set to expire again in January.
Also, remember the fight over increasing the debt ceiling? That resulted in bi-partisan deal, OKd by the Senate, House and White House that would result in $2.1 trillion in savings by 2021.
Part of deal called for budget caps that amounted to $917 billion in savings over a decade. The other part of the deal required a bi-partisan group of 12 lawmakers to identify $1.5 trillion in additional cuts. The so-called “super committee” failed, so the law automatically triggers $1.2 trillion in across-the-board cuts that take effect beginning Jan. 1.
In today’s report, the CBO says if Congress does nothing and the U.S. jumps off the fiscal cliff, it would result in a huge reduction of the deficit. It would go from $1.1 trillion to $200 billion in 2022. The debt would decline to 58 percent of the GDP in 2022.
On the other hand, if Congress decides to extend the Bush tax cuts and throws out the $1.2 trillion in across-the-board cuts, “annual deficits would average nearly 5 percent of GDP over the next decade, and debt held by the public would increase to 90 percent of GDP 10 years from now and keep rising rapidly thereafter.”
We’ll stop with the numbers and leave you with the big, easy to understand picture: Congress, the CBO says, has to rein in the debt or the country faces a higher likelihood of fiscal crisis or, for example, an inability to respond to “unexpected challenges “
In essence, there are two ways to rein in debt: Cut spending significantly on big ticket items like Social Security, Medicare, and Medicaid. Or keep those programs intact and significantly raise taxes on everyone.
“Ultimately, significant deficit reduction is likely to require a combination of policies, many of which may stand in stark contrast to policies now in place,” the CBO says.
In other words: A compromise between the two.
Update at 5:46 p.m. ET. The Fiscal Cliff:
The CBO also issued a separate report specifically on the different fiscal cliff scenarios. That can be found here.