If Congress does not extend the Bush tax cuts and reverse last summer's automatic budget cuts before they kick in next year, the country will plunge off a "fiscal cliff," the respected Congressional Budget Office predicted in a study released Tuesday. The cuts were part of the contentious debt ceiling agreement reached last summer, amidst much drama.
Most news reports on the CBO report focused on the predicted near-term problems of austerity, as outlined by the Associated Press. "The Congressional Budget Office report says that the economy would shrink by 1.3 percent in the first half of next year if the government is allowed to fall off this so-called "fiscal cliff" on Jan. 1 — and that the higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies are kept in place," wrote Andrew Taylor for the AP.
The CBO report is not a full-on embrace of avoiding fiscal discipline. It focuses equal weight on the long-term implications of avoiding fiscal discipline, predicting that "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."
"There have been two main responses to the crisis: austerity, and kicking cans down roads. Austerity, in case you haven’t noticed, is so last year. It’s out. Which means that unless something else is found, some other comprehensive plan, the other main response, can kicking, is going to run out of road," wrote Paul Vigna at the Wall Street Journal on Wednesday.
But Vigna wasn't writing about the U.S. fiscal crisis. He was writing about Europe's existential crisis surrounding Greece's rejection of austerity and imminent exit from the Euro. Different characters, similar plot.
Federal debt continues to rise at an unprecedented rate, the CBO report added, and this "could not be sustained indefinitely, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences — for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis.
And the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be."
The CBO report is a little short on solutions. Reducing restraint now "would have substantial economic costs over the longer run," it says. But imposing restraint now "would have substantial economic costs in the short run."
The solution the report seems to favor is to change tax and budget policies now, allowing the deficit to widen in 2013 but then "reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period."
Eric Schulzke writes on national politics for the Deseret News. He can be contacted at [email protected].