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Fiscal cliff forecast: Bad now, worse later

Budget analysts warn all options will be painful

- The Washington Times - Thursday, November 8, 2012

As Congress prepares to try to negotiate ways to avoid the fiscal cliff, its own scorekeeper has some stark analysis: There will be pain no matter what, but ducking choices now will mean an even worse situation by the end of the decade.

In two reports Thursday, the Congressional Budget Office laid out some of the options facing Washington as lawmakers return next week for a lame-duck session of Congress. But the CBO said that no matter what Congress does, the economy in the short term will struggle.

"Even if all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time," the CBO said.

However, the nonpartisan agency went on to say that canceling the looming tax increases and spending cuts due in January would deepen deficits and leave the country less able to handle a major crisis in the future.

"If the fiscal tightening was removed, and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis ... and would eventually reduce the nation's output and income below what would occur," the agency analysts said.

The reports were released as both sides gingerly begin to talk about a way forward on budget matters after this week's elections.

Voters sent Democrats back with an expanded majority in the Senate, sent Republicans back with a slimmer majority in the House, and renewed President Obama's lease on the White House, though by a narrower margin than in 2008.

Without a clear mandate for either side, both parties were searching for ways to head off the so-called fiscal cliff in as painless a way as possible.

House Speaker John A. Boehner, Ohio Republican, on Wednesday said the GOP won't accept tax increases, though it will accept changes that eventually would increase revenue through a more efficient tax code.

Democrats, though, said voters embraced higher tax rates, at least on the wealthy. Senate Majority Leader Harry Reid, Nevada Democrat, said that will have to be part of any package.

All sides appear to agree that taxes rates should be kept lower for most other Americans — something that the CBO said will indeed help the economy in the short term, but deepen deficits and hurt over the longer run.

With Congress and the White House now looking for common ground, the CBO laid out the exact short-term economic benefits of some options: Halting the $110 billion in automatic sequesters due Jan. 2 would raise gross domestic product by three-quarters of a percent next year, while extending all of the George W. Bush-era tax cuts, due to expire Jan. 1, would raise GDP by a little less than 1.5 percent.

The spending increase gets more bang for the buck, the CBO said, because recipients likely would save much of the tax cut rather than invest the windfall.

While the CBO doesn't take sides in congressional debates, its data bolstered several key Democratic claims.

First, CBO said, it's not likely that any single option would be enough to solve the budget problems — a conclusion that seemed to back Mr. Obama's rhetoric calling for a "balanced" approach that he said would couple tax increases with the possibility of spending cuts — though he has been far more specific on the tax increases than the spending cuts.

CBO also said that extending tax cuts for the wealthy has a lower economic impact than more government spending or extending tax cuts only for others.

The report gave the GOP some ammunition as well. It said future deficits will be driven chiefly by the growth of spending in entitlements such as Social Security, Medicare and Medicaid. The Republican presidential ticket talked about reforming those programs on the campaign trail, but Democrats have been reluctant to trim back those programs and ran a series of ads attacking Republicans over that.

Sen. Charles E. Schumer, New York Democrat, told reporters Thursday morning that "entitlements are on the table," but said that meant trying to find a way to offer the same services at cheaper rates rather than cutting the benefits available.

"I don't believe you have to change the basic structure of Medicare, Medicaid," he said.

Even those who insist the government can stand to cut $100 billion immediately said they don't support the automatic "sequesters" on Jan. 2. Sen. Tom Coburn, Oklahoma Republican, said rather than across-the-board cuts split between defense and domestic programs, Congress should come up with a package of specific cuts that eliminate wasteful or duplicative programs.

"It's not all that hard," he said. "The problem is that nobody wants to do the hard work and then defend politically what they've done."

Despite the dire warning, the CBO reports may do little to bridge ideological differences. However, lawmakers said it should be a prod to some action.

"The consequences of inaction will deliver a dramatic, short-term blow to the economy," said Sen. Max Baucus, chairman of the Senate Finance Committee, who asked the CBO do the reports.

All sides say they want to extend the tax cuts for 98 percent of taxpayers, but Republicans want them extended for the wealthiest 2 percent as well, arguing that those taxpayers are the small businesses and investors who spur the rest of the economy.

They want to keep the Bush-era tax cuts in place, and they also oppose ending deductions and loopholes unless that money is then pumped back into the tax code to lower rates.

The GOP says that would make the economy more efficient, which means businesses would make more money and pay more taxes on that added revenue. However, it's unlikely that the CBO would be able to score that revenue in its budget projections.

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