Just how the politically divided Congress and the Obama administration will muddle through the next six months is impossible to say, but their failure to come to grips with a raft of thorny spending and tax issues would pose hardships for millions of Americans reliant on government aid and possibly set back the economic recovery.
At the close of 2012 and the dawning of 2013, many major fiscal events are set to occur simultaneously. It’s what Federal Reserve Board Chairman Ben Bernanke has called “a fiscal cliff” of spending and tax changes of a high magnitude. These include expiration of the Bush era tax cuts, the payroll tax cut and other important tax provisions. They also include the activation of the first installment of the $1.2 trillion across the board cuts or ‘sequester” of domestic and defense spending. And, once again, Congress may have to raise the debt ceiling.
If Congress and the White House decide to extend the Bush tax cuts along with scores of other tax breaks, that would increase the debt in 2022 by about $7.5 trillion above what it would be if the tax cuts were allowed to expire, according to the Committee for a Responsible Federal Government. This means the debt would rise from 70 percent of GDP today to 88 percent by 2022.
Conversely, if those major tax cuts expire – a highly unlikely event – the Congressional Budget Office projected that the annual deficit would shrink from $1.1 trillion to $196 billion – an 82% reduction over the next six years.The resulting increase in tax revenues combined with spending cuts would nearly halve the deficit in 2013, lowering it to $585 billion.
The CBO calculated in January that if the tax cuts were extended, the economy in fiscal 2013 would be more than two percent larger than if the tax cuts were allowed to expire, while the unemployment rate would be one percent lower than otherwise. On the other hand, the CBO concluded that over the long run, a continuation of the tax cuts would slow the growth of the economy and add to unemployment because of the substantial debt accumulation.