Potential Harm in Delayed Decisions

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Uncertainty over how elected officials will deal with key fiscal decisions this year is already “weighing on the economy” and probably reducing spending by individuals and businesses, according to Doug Elmendorf, director of the Congressional Budget Office (CBO).

“We think it’s an issue now and will be increasingly an issue in the second half of the year in terms of people’s decisions,” Elmendorf said at a recent program hosted by the Christian Science Monitor. Substantial tax cuts are set to expire and large automatic spending cuts are scheduled to kick in, all around the end of the year – a “fiscal cliff” that could jeopardize the economic recovery.

In addition, the government expects to near its debt limit late this year, threatening a default unless the limit is raised. The CBO director warned that taxpayers could pay a high price if financial markets became seriously concerned about the possibility of default.

“Even a small increase in the perceived risk of Treasury securities would be very expensive for the country,” Elmendorf said. If Treasury rates moved up by only a tenth of a percent over the next decade, he said, that would add $130 billion to the government’s interest payments over that same period.

Elmendorf also expressed concern about Europe: “If European economies slow more than they already have, or especially if there is some greater tumult in the European financial system, that will be bad news for the U.S. economy.”

The Concord Coalition urges Congress and the President to deal with the fiscal cliff issues and the debt limit increase in a responsible fashion as soon as possible. This would reassure financial markets, bolster the economy, boost public confidence and enable government agencies to better plan for next year.

Concord supports a comprehensive approach to fiscal reform such as the Simpson-Bowles plan proposed, with significant changes to all parts of the budget. At a minimum, however, elected officials should not abandon the automatic cuts without approving substitute measures that would deliver the same amount of long-term deficit reduction.

Even if elected officials delay action until after the November election for political reasons — as is widely expected —  they should at least be working now on options that can be quickly implemented. With Europe’s continued difficulties, Washington should do everything possible to mitigate uncertainty in troubled world markets. Another round of default threats and political theatrics over the U.S. budget would be pouring gasoline on the fire.

External links:
Breakfast With Reporters (CBO Director’s Blog, With Audio)
More Eurozone Turmoil Would Be Bad News for U.S. Economy
Q & A With Elmendorf

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