Aug 22, 2012

CBO Scores Senate Dem Fiscal Cliff Strategy

All –

Wanted to make sure you saw the Congressional Budget Office score for the Patty Murray/Senate Democrat fiscal cliff strategy that was released this morning…

CBO Warns Of Deep Recession If Congress Fails To Stop ‘Fiscal Cliff’
The Hill
Erik Wasson
August 22, 2012
http://thehill.com/blogs/on-the-money/budget/244703-cbo-warns-of-deep-recession-if-congress-fails-to-act-on-fiscal-cliff

The non-partisan Congressional Budget Office on Wednesday warned the economy will enter a recession next year if the country goes over the so-called fiscal cliff.

In its most dire warning yet about the fiscal cliff yet, the CBO said the economy would contract by 0.5 percent in calendar year 2013 if the Bush-era tax rates expire and automatic spending cuts are implemented.

Unemployment also would rise from 8.2 percent in 2012 to 9.1 percent next year, it estimates.

The contraction would be very severe in the first half of 2013. CBO sees the economy contracting by 2.9 percent in the first half– deeper than the 1.3 percent negative growth it had seen previously from the fiscal cliff.

The gloomy picture of rising debt and weak economic growth marks CBO’s final major report before the November election. The report is a sharp contrast with the 1.1 percent in growth the CBO projected in January for 2013 and 0.5 percent growth it projected in May.

CBO says the fiscal cliff will be worse than it had previously projected and that the “underlying strength” of the economy is weaker.

It said the effects of the fiscal cliff are worse in part because Congress extended a payroll tax holiday in February that is also set to expire in January.

Congressional gridlock means the risks of Congress doing nothing to prevent the tax hikes and spending cuts is real.

Democrats last month threatened to let the nation go over the fiscal cliff unless Republicans agree to a “balanced” deficit package that includes some tax increases. The GOP has so far doubled down on its insistence that a deficit solution include only cuts to non-defense social spending.

CBO projects a deficit of $1.1 trillion this year, the fourth year of budget shortfalls over $1 trillion. This is a slight decrease from the $1.2 trillion that CBO projected in March.

The report notes that debt held by the public will reach 73 percent of the economy this year, “the highest level since 1950 and about twice the 36 percent of GDP that it measured at the end of 2007.”

The CBO report puts the focus back on President Obama’s economic policies and the fiscal issues that the Republican presidential ticket of Mitt Romney and House Budget Committee Chairman Paul Ryan (R-Wis.) considers its strength. The presidential debate this week has been dominated by a controversy surrounding abortion rights and the remarks of GOP Missouri senatorial candidate Rep. Todd Akin.

As usual, the CBO presents two sets of 10-year economic and deficit projections. One is based on current law and the other is based on what Congress has typically done in the past.

Under the current law baseline, the deficit next year would shrink to $641 billion.

This assumes that a series of policies known as the fiscal cliff take place. They include automatic spending cuts triggered by the August 2011 deal to raise the debt ceiling; expiration of the Bush era tax rates; a sharp cut in Medicare doctor payments; and the failure to index the alternative minimum tax for inflation, which would raise taxes for many households.

The $641 billion budget deficit estimate is larger than the $585 billion deficit CBO had projected in January.

Under these CBO assumptions, the government would add $2.3 trillion in deficits over the next ten years.

Under a current policy baseline in which Congress avoids the spending cuts, passes a “doc fix” and extends the Bush era rates, the deficit would again top $1 trillion in 2013.

But economic growth would be better. CBO estimates under this baseline that GOP growth would be about 1.7 percent, with unemployment dipping slightly to 8 percent.

In this scenario, over ten years nearly $10 trillion would be added in deficits and the debt held by the public would reach 90 percent of GDP—the threshold some scholars consider to be the hallmark of a Greece-style debt crisis.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) said he was continuing work on a “grand bargain” deficit-reduction plan that would avoid the fiscal cliff.

“This year’s deficit is a stark reminder of the Great Recession’s lasting impact on the nation’s balance sheet,” he said in a statement. “We know from experience that a recovery from a financial crisis is shallower and takes longer than a recovery from a typical recession.”

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