The CBO’s Updated Outlook: Still Gloomy

by Patrick Brennan

The CBO has updated its assessment of the risks presented by the “fiscal cliff,” the tax hikes and spending cuts that will automatically occur on January 1, 2013, if Congress takes no action:

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

Yes, I think we’d probably call that a recession. That said, the alternative isn’t exactly rosy: If we  preserve all the Bush tax policies (not just income-tax cuts, but the AMT fixes, capital-gains cuts, etc.), do the Medicare doc fix, keep the payroll-tax cut and unemployment-benefits extensions, and avoid sequestration (plus a few other things), the economy continues to wheeze: GDP growth from 4Q 2012 to 4Q 2013 would be a measly 1.7 percent, and unemployment will remain at 8 percent.

The good news is that if America does jump off the “fiscal cliff,” well, it’s one way to get some semblance of fiscal responsibility: The deficit would go from 2012’s $1.13 trillion gap to a veritably pocket-sized $641 billion. If we extend all current policy, the deficit in 2013 will be $1.04 trillion, dropping just $91 billion from 2012.

Congress remains a long way away from answering most of the questions about what to do about our 2013 budgetary polices (though some, such as the doc fix, are obvious), but some discussions have begun surrounding tax policy. Democrats in the Senate introduced and passed the Middle Class Tax Cut Act (S.B. 3412), which manages not to cut taxes for any middle-class Americans but does allow some tax hikes to occur: basically, almost all of them for people earning over $200,000/$250,000 a year. House Republicans have spurned the proposal, preferring to extend all the tax cuts, but it’s worth noting what a pathetic attempt at deficit reduction it would be. Table 1-5 of the CBO report limns this issue: An extension of all of the existing income-tax policies, as House Republicans would like, would increase the deficit by $247 billion in 2013, relative to the CBO’s current-law fiscal-cliff baseline (under which the deficit would be, as explained above, $641 billion). Meanwhile, the CBO’s approximation of the Democratic proposal would cost $205 billion relative to the baseline. That is, pushing only the rich off the fiscal cliff does basically nothing for the deficit: It would raise $42 billion, cutting the likely 2013 deficit by about 4 percent. (Ignoring all other policy changes except for tax policy, that deficit would be reduced from $888 billion to $844 billion.)

The CBO has a neat graphic to explain these various economic projections:

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