The Congressional Budget Office warns in a report Thursday that allowing tax hikes and spending cuts to occur – going over the fiscal cliff – could cause a recession.
America’s budgetary scorekeepers have published a postelection “FYI” for the president and Congress, with this blunt message: That “fiscal cliff” thing is dangerous, but so is the opposite policy of ignoring the national debt.
“Fiscal cliff” is the nickname for a collection of tax increases and federal spending cuts that are scheduled to take effect at the start of next year.
Economists at the nonpartisan Congressional Budget Office (CBO) warned in a report Thursday that allowing those tax hikes and spending cuts to occur “will probably cause the economy to fall back into a recession next year.”
But, the CBO report added in the next breath, letting the policy changes take effect would actually “make the economy stronger later in the decade and beyond.” The reason: The tax hikes and spending cuts would reduce federal deficits, thus avoiding a dangerous surge in federal debt as a percentage of gross domestic product (GDP).
What this implies is that there’s a very tricky job ahead for a Democratic president, a Republican-led House, and a Democratic-majority Senate.
The ideal way forward, suggested in the CBO report and in other independent reviews, would be to change the cliff into a gradual slope – one that avoids recession in the near-term but still leads down a path of deficit reduction. It’s not just a matter of saying, “Let’s postpone those tax and spending changes.”
Elected officials in both parties have endorsed the general idea of long-term fiscal reform. But the choices are difficult. The new report, titled “Choices for Deficit Reduction,” makes a big deal of that.