CBO Report Warns About Upcoming “Fiscal Cliff”

by Rebecca Farley on May 24, 2012

The Congressional Budget Office (CBO) this week released a report warning that the economy might enter another recession if Congress fails to take action on a trio of fiscal issues set to take effect automatically at the end of the year. By December or early January: the Bush-era tax cuts will expire, increasing the tax rates on middle-class and wealthy families; “sequestration” will go into effect, automatically cutting nearly $100 billion from federal spending across the board; and payments to physicians under Medicare will be slashed.

These policies collectively would reduce the federal deficit by $607 billion in 2012 and 2013. Yet, according to the CBO, they could cause the economy to contract and trigger another recession (defined as two consecutive quarters of negative economic growth). CBO noted that reducing the federal deficit is critical to the long-term health of the economy. However, it warned that allowing the country to head over this “fiscal cliff” would jeopardize the fledgling recovery and suggested that cuts should instead be implemented in the future when the economy is in a stronger state.

The convergence of these three major fiscal issues is the result of several successive legislative “patches” in which lawmakers have repeatedly postponed the effective date of the Medicare payment cut and the expiration of the Bush tax cuts. Sequestration is scheduled to go into effect in January 2013 under the terms of the Budget Control Act of last August. For the National Council’s complete coverage of the federal deficit and the annual appropriations process, please see the Federal Budget section of our blog.

 

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