NCPA - National Center for Policy Analysis

A "Cliff" Deal Could Still Cost Consumers Billions

November 29, 2012

Even if the country doesn't slide over the fiscal cliff, any deal to blunt the impact of the scheduled tax hikes and spending cuts is likely to create at least some drag on an economy that is still growing only modestly, says the Fiscal Times.

  • The full set of changes would take more than $600 billion from the economy, according to the Congressional Budget Office (CBO).
  • While the outlines of any deal are still sketchy to say the least, Goldman Sachs economists are modeling a $233 billion economic hit as their "base case scenario."
  • Most of that impact -- $218 billion -- is likely to hurt the individual taxpayer the most because of many tax increases.
  • For instance, the expiration of the payroll tax cut is expected to cost $126 million.
  • As a result, the loss in consumer income would likely translate to $110 billion reduction in consumer spending, according to Goldman Sachs economists.

Holiday spending, a major source of revenue for many retail stores, could be curtailed if consumers don't see action on the fiscal cliff.

  • Fifty-one percent of respondents in a survey said that they would curtail holiday spending because of the risk of the fiscal cliff.
  • Before the fiscal cliff negotiations began last week, the Consumer Electronics Association projected that holiday sales would increase 4.1 percent to $586.1 billion this year.
  • However, 64 percent of respondents said that the current political and economic uncertainty was weighing on their spending plans.

The president and CEO of the National Retail Federation sent a letter to President Obama urging his administration to come to a deal that would avert the fiscal cliff. He said that consumer confidence is necessary for an important holiday sales season and that the retail industry with its millions of jobs depended on it.

Analysts at Moody's Investor Service said that the fiscal cliff was unlikely to deter many consumers because most people want to spend money to celebrate the holidays. However, they did say that consumers are likely to rein in spending compared to last year by about 2.5 percent.

Source: "A 'Cliff' Deal Could Still Cost Consumers $218B," Fiscal Times, November 21, 2012.


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