No agreement could lead to recession, rise in unemployment
President Obama Friday invited congressional leaders to the White House next week for talks about the budget and the fiscal cliff. His invitation comes a day after the non-partisan Congressional Budget Office released projections about the consequences should a bipartisan agreement not be reached on the looming $600 billion in tax cuts and mandatory spending cuts.
The CBO report projects that should “fiscal tightening” occur, the gross domestic product (GDP) will drop by 0.5 percent in 2013 and this contraction of the economy that will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013.
Bush-era tax cuts, enacted in 2001 and 2003, and extended from 2009, are set to expire on December 31, sending the tax rate for all Americans to return to Clinton era levels. Compounding this burden, payroll taxes will increase by 2 percent for all Americans should the payroll tax cuts expire as scheduled, while allowing the middle class tax cuts to expire will cost the average middle class family about $3,600 annually.
Beyond the fiscal cliff, the borrowing cap will be reached in the next two months, setting the stage for a repeat of the 2011 debt-ceiling debate and gridlock that resulted in the first-ever downgrade of the country’s credit rating by Standard & Poor’s, sparking months of stock market volatility.
There are other options. If Congress blocks the spending cuts and extends all of the expiring tax cuts (except for the payroll tax break), the economy would grow by 2.25 percent, the CBO projects. Adding the payroll tax cut and an extension of unemployment benefits would nudge the growth closer to 3 percent.
Continuing the breaks for all taxpayers would boost GDP by 1.5 percent. An extension just for families making less than $250,000 and individuals earning less than $200,000 would expand the economy by 1.25 percent.
The CBO has previously cautioned that the U.S. economy could slip back into a recession should no action on the fiscal cliff be taken.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.