Facing the ‘Fiscal Cliff’

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The Congressional Budget Office (CBO) has released an excellent analysis of the “fiscal cliff” facing the country in the form of large policy changes that are scheduled to take effect at the end of this year.

The CBO warns that policymakers face difficult trade-offs because of the weak economic expansion and the high projected federal deficits in coming years. The agency found that reducing or eliminating the fiscal restraint now scheduled to happen “would boost economic growth in 2013, but . . . adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run.”

Diane Lim Rogers, chief economist for The Concord Coalition, praised the CBO report in a recent blog post for its analysis of the policy choices that need to be considered. She notes that the CBO warns of a dramatic fall-off in consumer demand and in overall economic activity if all of the scheduled policy changes were to take effect at year’s end.

The main changes include the expiration of the 2001 and 2003 tax cuts, the expiration of the payroll tax cut, and the beginning of automatic spending cuts that are required by the debt limit law passed last August.

The CBO’s work, Rogers writes, points in the same direction as the recommendations that emerged from the bipartisan Bowles-Simpson and Rivlin-Domenici fiscal commissions: a combination of policies that would support the economy in the short run while putting measures in place that would reduce projected deficits later in the decade and beyond.

Concord has strongly supported efforts such as the Cooper-LaTourette budget plan in the House and the “Gang of Six” discussions in the Senate that would follow up on the Bowles-Simpson proposals.

“Ultimately, we must reduce the deficit,” Rogers writes. “Plowing straight ahead over the cliff in January 2013, however, would be bad fiscal policy.” On the bright side, she says, dealing with the policies comprising the cliff this year provides “an opportunity to take a more constructive attitude toward deficit reduction.”

Read more with CBO Warns About Fiscal Cliff

External links:
Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013 (CBO)

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