"Fiscal Cliff" Could Trigger Recession

November 13, 2012

The fiscal cliff would drive the U.S. economy back into recession next year and result in a jump in the jobless rate to 9.1 percent by the end of 2013, according to a new report from the Congressional Budget Office (CBO), says the Wall Street Journal.

The fiscal cliff refers to a combination of tax increases and spending cuts in an effort to control the deficit. It is slated to make about $55 billion in defense spending cuts and another $55 billion in cuts to other programs. According to the CBO, the fiscal cliff would:

  • Decrease economic output by 0.5 percentage points in 2013.
  • Put 400,000 jobs in jeopardy.
  • Gross domestic product (GDP) would rise by 0.4 percent.

The CBO did say, however, that in the long run, the U.S. economy would be better because of higher growth rates and lower unemployment. For example, if action is taken, the budget deficit would be $503 billion higher than it otherwise would be in fiscal year 2013.

Without action, dividend and capital gains tax rates will increase while the estate tax reverts to a higher rate. The CBO also projects the economic implications if policymakers were to pursue certain measures to avoid the impact of the fiscal cliff:

  • Extending tax provisions and keeping the alternative minimum tax would boost GDP and generate 1.8 million jobs.
  • Increasing taxes on only wealthy Americans would increase GDP by 1.3 percent and create 1.6 million new jobs.
  • If the payroll tax cut and expanded jobless benefits program are continued there would be a 0.7 percent increase to economic output as well as an increase of 800,000 jobs.

Source: Corey Boyles, "CBO: 'Fiscal Cliff' Could Trigger Recession," Wall Street Journal, November 8, 2012.

 

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