Approaching the Fiscal Cliff

The Congressional Budget Office’s update to the fiscal outlook can be summed up very simply: it’s worse than they thought.

In January, we will run into the “fiscal cliff” made up of spending cuts and tax hikes.  The ‘cliff’ was the result of last summer’s debt ceiling compromise: starting in 2013, automatic spending cuts will go into effect, and at the same time the Bush-Obama tax cuts will expire.

The cliff is steeper than the CBO previously estimated.  Back in May, the CBO projected that the fiscal cliff could push the economy into a recession.  Now it looks worse.

Growth would shrink .5%.

Unemployment would rise to 9%.

But on the upside, falling off the cliff would reduce the deficit.  This year – for the 4th year in a row- the deficit will hit $1.1 trillion…that amounts to 7.3% of economic growth.  The cliff’s spending cuts and tax increases would bring next year’s deficit down to $641 billion…4% of the economy’s growth.  That would be the biggest single year percentage drop in the deficit since 1969.

The public is currently holding an estimated 73% of the government’s debt.  That would fall to 58.5% by 2022.  Without the cliff, debt held by the public would rise to 90% by the end of the decade…the highest level since WWII.

The fiscal cliff would improve the deficit over the long-term, but it would sacrifice growth and jobs in the short-term.  And the toss up between the two will no doubt make for some very partisan politics in the next couple of months.