Study warns of another recession if 'fiscal cliff' not addressed, Obama re-enters debate
Published November 09, 2012
WASHINGTON – The double-whammy of spending cuts and tax hikes set to take effect in January would send the nation into another recession and drive up the jobless rate to 9.1 percent by next fall, congressional budget analysts said.
The startling new report by the Congressional Budget Office comes as Capitol Hill leaders and President Obama prepare for a lame-duck session of Congress where the so-called "fiscal cliff" will take center stage. Obama planned Friday to offer a framework for talks, speaking from the East Room of the White House in his first post-reelection address from Washington.
A lot is at stake. The new Congressional Budget Office report on Thursday predicted that the economy would fall into recession if there is a protracted impasse in Washington and the government falls off the fiscal cliff for the entire year. The CBO analysis says that the cliff -- a combination of automatic tax increases and spending cuts -- would cut the deficit by $503 billion through next September, but that the fiscal austerity would cause the economy to shrink by 0.5 percent next year and cost millions of jobs.
The potentially economy-crippling set of tax increases and automatic spending cuts is due to hit in January unless congressional leaders can overcome a key impasse. Democrats continue to demand that the Bush-era tax rates lapse for those making $250,000 and up. Republicans continue to insist on keeping tax rates stable for everyone.
House Speaker John Boehner, though, has said he's willing to accept "new revenue" -- perhaps by closing loopholes and other deductions -- as part of overall tax reform in exchange for serious entitlement cuts.
"Raising tax rates is unacceptable," House Speaker John Boehner, R-Ohio, declared Thursday on ABC. "Frankly, it couldn't even pass the House. I'm not sure it could pass the Senate."
Boehner has suggested a "bridge" bill to avoid the "cliff" in the short term and allow for a bigger deal in 2013.
Obama faces a tough, core decision: Does he pick a fight and risk a prolonged impasse with Republicans or does he rush to compromise and risk alienating Democrats still celebrating his victory?
Many of his Democratic allies hope Obama will take a hard line when he addresses the matter Friday. Republicans warn that a fight could poison efforts for a rapprochement in a bitterly divided Capitol and threaten his second-term agenda.
Some analysts believe that the fiscal cliff is more like a fiscal slope and that the economy could weather a short-term expiration of the Bush-era tax rate and that the government could manage a wave of automatic spending cuts for a few weeks. But at a minimum, going over the fiscal cliff would mean delays in filing taxes and obtaining refunds and would rattle financial markets as the economy struggles to recover.
The new study estimates that the nation's gross domestic product would grow by 2.2 percent next year if all Bush-era tax rates were extended and would expand by almost 3 percent if Obama's 2 percentage point payroll tax cut and current jobless benefits for the long-term unemployed were extended as well.
All sides say that they want a deal and that now that the election is over everyone can show more flexibility than in the heat of the campaign.
Obama is not expected to offer specifics immediately. His long-held position -- repeatedly rejected by Republicans -- is that tax rates on family income over $250,000 should jump back up to Clinton-era levels.
Republicans say they're willing to consider new tax revenue but only through drafting a new tax code that lowers rates and eliminates some deductions and wasteful tax breaks. And they're insisting on cuts to Medicare, Medicaid and food stamps, known as entitlement programs in Washington-speak.
The current assumption is that any agreement would be a multistep process that would begin this year with a down payment on the deficit and on action to stave off more than the tax increases and $109 billion in across-the-board cuts to the Pentagon budget and a variety of domestic programs next year.
The initial round is likely to set binding targets on revenue levels and spending cuts, but the details would probably be enacted next year.
While some of that heavy work would be left for next year, a raft of tough decisions would have to be made in the next six weeks. They could include the overall amount of deficit savings and achieving agreement on how much would come from revenue increases and how much would be cut from costly health care programs, the Pentagon and the day-to-day operating budgets of domestic Cabinet agencies.
Democrats are sure to press for a guarantee that tax reform doesn't end up hurting middle-income taxpayers at the expense of upper-bracket earners. Republicans want to press for corporate tax reform and a guarantee that the top rate paid by individuals and small businesses goes down along the way.