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Congress Faces Stark Choices as Economy Approaches Year-End Fiscal Cliff, CBO Says Congress Faces Stark Choices as Economy Approaches Year-End Fiscal Cli...

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Congress Faces Stark Choices as Economy Approaches Year-End Fiscal Cliff, CBO Says


Congressional Budget Office (CBO) Director Douglas Elmendorf prepares to testify on Capitol Hill in Washington, Wednesday, Oct. 26, 2011.  (AP Photo/J. Scott Applewhite)

The drumbeat about the magnitude of year-end tax and spending decisions continued on Wednesday, as the Congressional Budget Office released its updated economic and budget outlook for the next 10 years and its final forecast before the election.

Much of the country’s economic future now hangs on the choices Congress makes in the six weeks following the election, when the Bush-era tax cuts and the payroll-tax holiday are set to expire; the across-the-board spending cuts to defense and nondefense programs will take affect; and the length of time under which people can collect emergency unemployment benefits will decrease.


This would shrink the deficit to an estimated $641 billion in fiscal year 2013, from its current estimate for FY12 of $1.1 trillion. That’s roughly a $500 billion reduction in the deficit. The country has not seen such a steep drop in the deficit as a share of gross domestic product since 1969.

But, this same fiscal contraction would also lead to a significant recession, according to the CBO, with unemployment rising to as high as 9.1 percent by the end of 2013 and remaining above 8 percent through 2014. The CBO now projects that the underlying strength of the economy is slightly weaker than it previously estimated, and with such modest economic growth, it would take little to push the U.S. back into an economic downturn.

The alternative, of course, is for lawmakers to extend these tax and spending policies for some period of time, adding to the deficit but maintaining the slow, steady pace of the economic recovery. Under this scenario, the deficit would clock in at more than $1 trillion and revenues would be 16.3 percent of GDP for 2013, but unemployment would hover around 8 percent by the fourth quarter of 2013.


The only problem with this scenario is a level of debt so unsustainable that it would ultimately lead to a “fiscal crisis,” said Douglas Elmendorf, director of the CBO. Under this scenario, the debt held by the public would climb to 90 percent of GDP by 2022. The country has not seen that scope of debt since the years just after World War II—and that’s a level of debt that the CBO calls “unsustainable.”

Elmendorf added that such rising levels of debt could hurt people’s ability to save money; it would require the federal government to make larger and larger interest payments; and it would give the federal government less flexibility to respond to a future crisis, be it economic or security-related. Not only that, but it would require either huge tax increases or deep spending cuts, or some mixture of the two, Elmendorf added.

If lawmakers go over the so-called fiscal cliff at year's end, the CBO estimates that debt held by the public would decrease to 58 percent of GDP by 2022. Currently, the debt held by the public is 73 percent of GDP.

This updated forecast underscores the significance of the politics and policy of the lame-duck session—along with the nuanced, tough choices lawmakers will face. There’s nothing new about the decisions confronting lawmakers, Elmendorf stressed, nor does Congress have to go down either stark path. “It’s not an either-or choice for Congress,” Elmendorf said. “There’s an entire spectrum they have.”


The unemployment numbers offer just one snapshot of the divergent paths that the economy could take based on lawmakers’ actions. If they opt to go over the cliff, the unemployment rate will rise to as high as 9.1 percent by the end of 2013. If Congress puts off the tax and spending policy decisions, unemployment is expected to hit 8 percent by the fourth quarter of 2013—that’s a difference of about 2 million American jobs, budget analysts say.

That’s a stat that makes tax and budget issues suddenly seem quite relevant and real.

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