Nov. 8, 2012 – 6:17 p.m.

CBO Says Averting Fiscal Cliff Would Boost Economy by 3 Percent

The Congressional Budget Office, weighing in on the fiscal cliff issues confronting Congress, issued a pair of reports on Thursday that said averting the full array of expiring of tax cuts and automatic spending reduction would add about 3 percent to economic activity next year.

The assessment came as CBO affirmed its view that allowing the slate of fiscal measures to tumble forward at the start of 2013 would send the economy into recession, triggering a 0.5 percent contraction in GDP.

CBO issued the reports as Congress returns next week to face the politically-charged issues that figured heavily in the presidential campaigns and have dominated discussions in post-election Washington. Returning lawmakers, CBO said, face a daunting fiscal challenge.

“With the population aging and health care costs per person likely to keep growing faster than the economy, the United States cannot sustain the federal spending programs that are now in place with the federal taxes (as a share of GDP) that it has been accustomed to paying,” said CBO, adding that even keeping the debt from continuing to grow “will be a formidable task.”

The agency projected earlier this year that if the tax cuts are allowed to expire at the end of the year and the automatic cuts are triggered Jan. 2, the economy would take a more than $600 billion hit next year likely leading to a recession in 2013.

In its latest analysis, CBO estimated how delaying the sequester or scheduled expiration of various tax cuts for two years — 2013 and 2014 — would benefit the economy in the short run.

Extending all the expiring tax cuts except the payroll tax cut, the general position favored by most Republicans in Congress, would boost GDP by almost 1.5 percent by the end of 2013.

President Obama has called for letting tax rates on families who earn more than $250,000 expire and rise to approximately the levels where they were during the Clinton administration. CBO estimated that would boost GDP by 1.25 percent next year.

Just delaying the sequester, which is set to cut spending by $109 billion in 2013, would increase economic growth by about three-fourths of a percentage point, CBO said.

Delaying the end of all the tax cuts including the payroll tax cut, extending emergency unemployment insurance and putting off the sequester would boost economic activity by 3 percent in 2013, the agency estimates, equal to about $450 billion in an economy that measured some $15.3 trillion in activity in 2011.

In laying out potential approaches to reducing the debt, CBO said the deficit would be reduced most by cutting back health care and entitlement spending, less so by reductions in other mandatory spending programs or discretionary spending.

Repealing provisions of the 2010 health care law would cut the deficit by $150 billion in 2020, the agency said. Raising the eligibility age for Social Security or reducing the benefits paid by the program would decrease outlays by $30 billion in 2020.