EPI: A Fiscal Obstacle, Not A Cliff: Economic Impacts of Expiring Tax Cuts & Policy Recommendatioins

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A fiscal obstacle course, not a cliff:

Economic impacts of expiring tax cuts and impending spending cuts, and policy recommendations

"The focus of economic policy debate has turned to what has been called the “fiscal cliff”—the impact of tax cuts set to expire and spending cuts due to take effect at the end of calendar year 2012. For various reasons, “fiscal cliff” is a poor metaphor, most importantly because there is no single cliff but rather a series of separable tax and spending provisions that can be extended or ended.We thus propose a different metaphor—the fiscal obstacle course—with the obstacles in question standing in the way of rapid economic recovery and lower unemployment.

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"...... If all of the tax increases and spending cuts currently set to kick in at the beginning of next year actually take effect, the economy will surely re-enter a recession......"

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---The single largest projected economic drag posed by federal fiscal policy is the expiration of the remaining temporary ad hoc stimulus measures (extensions of emergency unemployment compensation, payroll tax cuts, and other measures described in more detail in this paper), which is projected to slow real GDP growth by 1.4 percentage points and lower nonfarm payroll employment by over 1.6 million jobs by the end of 2013....

---The second-largest headwind comes from spending cuts scheduled under the 2011 debt ceiling deal, which threaten to shave 1.1 percentage points from GDP growth and reduce employment by more than 1.3 million jobs by the end of 2013, relative to prior law. Over a third of this drag comes from discretionary spending caps largely ignored in the fiscal cliff discussion....

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"....Given perpetual (and often misplaced) concern that federal budget deficits are failing to decline rapidly enough, it is important to be clear about the precise danger the fiscal obstacle course presents: It is simply that the budget deficit would shrink too quickly—that is, public debt would stop rising fast enough—to maintain economic growth, let alone an adequate pace of growth to lower the unemployment rate........"

http://www.epi.org/publication/ib338-fiscal-cliff-obstacle-course/

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Recommendations

"....First, letting the upper-income Bush tax cuts and estate and gift tax cuts expire will pose negligible harm to the near-term economic outlook, yet expiration of both would produce substantial savings over the coming decade or could finance much more cost-effective fiscal support.

Second, the expiration of temporary, targeted stimulus and implementation of Budget Control Act spending cuts will pose substantial impediments to growth.

Third, any economic drag that follows from raising taxes can be offset with efficient, temporary fiscal support that trades bigger near-term deficits and greater economic growth for medium- and long-run deficit reduction relative to current budget policies.

The current path leads to a recession in 2013. We can fall right into it, barely avoid it, or sail past it, depending on how nimbly we navigate the fiscal obstacle course.


http://www.epi.org/publication/ib338-fiscal-cliff-obstacle-course/

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