Bloomberg News

Averting U.S. Spending Cuts Has Biggest Effect, CBO Says

November 08, 2012

Avoiding automatic spending cuts that are part of the U.S. government’s so-called fiscal cliff would have the biggest economic effect per dollar, the Congressional Budget Office said in a report today.

The report reaffirmed the CBO’s previous projections that allowing the scheduled tax increases and automatic spending cuts to take effect would lead to a recession in the first half of 2013. It also analyzed the economic effects of each part of the scheduled changes. The spending cuts would affect defense and non-defense programs.

“Because the tax cuts have been in place for so long, CBO expects that households would view an extension of current tax rates as a continuation of established tax policy and would therefore alter their spending very little,” the report said.

Congress returns to Washington next week for a post- election session that will focus on the fiscal cliff. Republicans and Democrats are deadlocked over how to address the issue.

Tax cuts first enacted during George W. Bush’s presidency are scheduled to expire Dec. 31. Republicans want to extend them for all levels of income, while Democrats are pushing to extend them only for annual income up to $200,000 a person or $250,000 for a married couple.

Increasing GDP

Eliminating the defense spending cuts would increase the nation’s gross domestic product by about $1.20 for each dollar that would be added to the budget deficit as a result, the CBO said. Extending the tax breaks for everyone would increase GDP by about 50 cents for every dollar of additional deficit in 2013, it said.

Extending unemployment benefits, continuing the payroll tax cut, avoiding non-defense spending cuts and scheduled cuts in payments to doctors under Medicare would all have larger economic effects per dollar of U.S. deficit cost than the tax- cut extensions.

The report, requested by Senate Finance Chairman Max Baucus, a Montana Democrat, said that extending of all the tax cuts would protect 1.8 million jobs from being lost. Among that number, 200,000 jobs would be protected by extending the tax cut for top earners.

Eliminating the spending cuts would prevent 800,000 jobs from being lost, CBO said. The report provided the figures as the most probable effect inside of a range.

Long Run

In the long run, CBO said, avoiding the fiscal cliff without eventually cutting the deficit would hurt the economy because of a “continued surge in federal debt.”

House Speaker John Boehner said yesterday that he and other Republicans are ready to work with President Barack Obama, who won a second term in the Nov. 6 election.

Democrats are sounding similar notes. Like Republicans, they haven’t offered plans that go beyond their campaign proposals.

Representative Sander Levin, the top Democrat on the House Ways and Means Committee, said in a phone interview today that the report underscores the party’s position on the top tax rates.

A full extension of the tax cuts for all income levels would increase GDP in the fourth quarter of 2013 by 1.4 percent, compared with their expiration. A similar policy without extending tax cuts for top earners would increase GDP by 1.3 percent.

Unfinished Business

“Let’s get the unfinished business done and then set the stage for next year,” Levin said.

Michelle Dimarob, a spokeswoman for the House Ways and Means Committee, said in a statement that Congress should prevent the tax increases and overhaul the tax code.

“Today’s report confirms that raising taxes on all taxpayers will result in fewer ‘help wanted’ signs hanging in the windows of businesses across the country,” she said. “Job creators agree and have made it clear that raising taxes will result in a weaker economy and fewer jobs for the millions of Americans struggling to find work.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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