The scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending – a development that some observers have referred to as a “fiscal cliff” – will dramatically lower the federal budget deficit between 2012 and 2013.
According to CBO’s estimates, this fiscal cliff will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013. Under those fiscal conditions, growth in real GDP in calendar year 2013 will be just 0.5 percent. CBO expects the economy to slip into a recession in the first half of 2013 as real GDP contracts at an annual rate of 1.3 percent before expanding at an annual rate of 2.3 percent in the second half of 2013.
However, eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. Federal debt held by the public would grow at a faster rate than GDP. CBO views this path as unsustainable – increasing the likelihood of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates.
Read the CBO's full report.