Friday, November 9, 2012

CBO Details Economic Impact of Fiscal Cliff

The Congressional Budget Office has released a report detailing the economic effects of various components of the fiscal cliff. The CBO report details two scenarios, the first assumes that all of the components of the fiscal cliff go into effect. Under this scenario GDP would shrink by 0.5% in 2013, reflecting a decline early in the year, with a recovery following in the second half.

In the second scenario, the CBO assumes that the fiscal cliff is avoided entirely. This includes eliminating the automatic sequestration, maintain medicare payment rates and extending all expiring tax provisions. Under this scenario, GDP receives a 2.25% boost.

The CBO noted that "of the total difference in the projected growth of GDP next year under current law and under the alternative fiscal scenario, about two=thirds owes to changes in tax policies and about one-third owes to changes in spending policies." Changes in spending account for about half the estimated effect of the expiring tax provisions even though the budgetary impact of changes in spending are less. As such the CBO recommends that the spending cuts may carry the most "bang for the buck."

For a more detailed break-down of the impacts of the fiscal cliff, see the CBO report.

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