–Congressional Budget Office: Fiscal Cliff Could Lead To ’13 Recession
–CBO: Renewing Current Policies Would Impose ‘Substantial’ Econ Costs
–Rep. Van Hollen: CBO Report Shows ‘Dire’ Effect Of Fiscal Cliff

By John Shaw

WASHINGTON (MNI) – Those lawmakers seeking another opinion on the
consequences of the United States plunging over the much-discussed
fiscal cliff received it this week with a sobering assessment by the
Congressional Budget Office.

The CBO, in a policy paper, said the combined effects of the
expiration of the Bush-era tax cuts at the end of 2012 and the scheduled
imposition of across-the-board spending cuts could shove the U.S. into a
mild recession in the first half of 2013.

The CBO paper said allowing the tax cuts to expire and spending
cuts to take hold would reduce the federal budget deficit by $607
billion, or 4% of gross domestic product, between fiscal years 2012 and
2013.

This immediate fiscal constraint, the CBO argues, would slow the
economy.

“If history is a guide, such a contraction in the economy in the
first half of 2013 would probably be deemed a recession by the National
Bureau of Economic Research,” the CBO paper says.

“The economic outcomes that CBO expects, under current law, for the
first half of 2013 strongly resembles mild recessions that occurred in
the past,” it added.

The CBO paper said under current policies (tax cuts expire and
spending cuts go forward), real GDP would increase by 0.5% in 2013.

“That small gain for the year as a whole reflects a contraction in
output at an annual rate of 1.3% during the first half of 2013 (measured
as growth between the fourth quarter of 2012 and the second quarter of
2013) as the fiscal restraint takes effect and then a renewed expansion
in output at an annual rate of 2.3% in the second half of 2013 (measured
as growth between the second and fourth quarters of 2013),” the CBO
paper says.

The CBO paper spells out the “difficult trade-offs” for
policymakers as they consider future fiscal policy.

On the one hand, CBO notes that postponing indefinitely or
cancelling the scheduled fiscal tightening would “lead to a greater
accumulation of government debt and might raise doubts about whether
longer-term deficit would ultimately take effect.”

But CBO notes that allowing deep tax increases and spending cuts to
go forward immediately “represent an added drag on the weak economic
expansion.”

While the CBO does not offer policy recommendations, its discussion
of the options before lawmakers suggests a substantial and specific
deficit reduction package that is phased-in gradually is the most
reasonable approach.

“Although there are trade-offs in choosing when policy changes to
reduce future deficits should take effect, there are important benefits
and few apparent costs from deciding quickly what those changes will
be,” the CBO paper says.

Rep. Chris Van Hollen, the ranking Democrat on the House Budget
Committee, said the CBO report offers an “extraordinarily clear and dire
picture” of the consequences of plunging over the fiscal cliff.

He said a “balanced” deficit reduction plan would be a much better
alternative for the nation.

The CBO’s discussion of options regarding the fiscal cliff are
broadly similar to those expressed in a policy paper this spring by The
Committee for a Responsible Federal Budget, a budget watchdog group.

The budget group said plunging over the fiscal cliff is very
dangerous for the U.S. — but renewing all the current tax and spending
policies is even more damaging.

“Allowing the country to hit the fiscal cliff at year’s end would
be a dangerous mistake, but adding $7.5 trillion to our debt by
extending the expiring policies and repealing the sequester, without
putting the budget on a more sustainable path, would be a travesty,” the
budget group wrote.

The budget group called for a “gradual and thoughtful plan to
stabilize and then reduce the debt.”

Federal Reserve Chairman Ben Bernanke has said Congress should
“figure out ways to achieve the same long-run fiscal improvement (as the
fiscal cliff) without having it all happen at one date.”

** MNI Washington Bureau: (202) 371-2121 **

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