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CBO Outlines 'Cliff' Options and Consequences CBO Outlines 'Cliff' Options and Consequences

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Economy / BUDGET

CBO Outlines 'Cliff' Options and Consequences

(AP Photo/Dan Nephin)

November 8, 2012

Two reports released on Thursday by the Congressional Budget Office give new ammunition to lawmakers in an already-contentious battle over the nation’s fiscal future.

Neither changes the overall picture: There will be dire economic consequences if Congress can’t agree on a plan to sidestep the combination of tax hikes and spending cuts known as the fiscal cliff that looms at the end of the year.

One of the reports released by the nonpartisan CBO, the official numbers-cruncher on Capitol Hill, warned that going over the cliff could send the country back into recession and cause unemployment to rise to 9.1 percent by the end of next year.

But the report also delved deeply into alternatives for policymakers, outlining how the tax hikes and spending cuts could be avoided and how they would impact employment and economic output. In doing so, the report provides fodder for lawmakers seeking to bolster their approach to deficit reduction.

One section that is sure to give Republicans some ammunition for the debate ahead is the CBO’s finding that extending income tax cuts for all Americans, including the wealthy, would boost GDP by a quarter of a percent more than if the cuts were extended only on income below $250,000. Republicans have strongly resisted President Obama’s calls to increase tax rates on the richest Americans.

“[K]eep in mind the economy might well grow less than 2% next year as is,” James Pethokoukis, a blogger for the conservative American Enterprise Institute, wrote in a blog post. “I think losing a quarter point is a pretty good chunk of growth.”

In another report released on Thursday, the CBO explored alternative policies that lawmakers could enact to reduce the deficit. In identifying changes to mandatory spending that would significantly reduce the deficit, for example, CBO offered three major options: repeal certain provisions of Obama’s landmark Affordable Care Act to reduce the deficit by $150 billion in 2020; either reduce Social Security benefits or raise the age for qualifying to save $30 billion; or allow the dreaded automatic spending cuts under sequestration to go into effect to reduce the budget by $15 billion in 2020.

With Congress so divided, any of those approaches to deficit reduction will be difficult to enact.

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