How Congress Can Avoid the 'Fiscal Cliff'

There is a way to avoid both a recession or a rise in national debt if Congress acts on the federal budget.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

The headlines generated by two recent Congressional Budget Office reports could lead policymakers to think they are in a damned-if-you-do-damned-if-you-don't dilemma over their budget choices: Reducing the deficit risks a recession; not reducing it leads to a dangerous and unprecedented debt explosion. But a closer read of the Congressional Budget Office reports says that if lawmakers have the will, they can find the way to avoid both.

Congressional Budget Office's report on the economic consequences of letting expire all the tax and spending changes scheduled take effect at the start of January, widely referred to as the "fiscal cliff," found that the resulting large reduction in the deficit would likely throw the economy into a recession in 2013. My Center on Budget and Policy Priorities analysis cautioned that policymakers should not think that the economy would plunge immediately into recession on January 1 if these policy changes went into effect. They would have some time, although not a lot, to put better policies in place.

[ See a collection of political cartoons on the economy.]

Congressional Budget Office's report on the long-term budget outlook explains in graphic detail why it would be serious mistake to kick the can down the road and simply extend all the expiring tax and spending provisions and suspend the automatic spending cuts ("sequestration" to budget wonks) required by last year's Budget Control Act. Without a politically sustainable long-term deficit-reduction deal, the United States faces the possibility of federal debt held by the public rising to twice the size of the economy by 2037.

Congressional Budget Office doesn't make policy recommendations, but in its report on the economic effects of addressing the fiscal cliff, it wrote:

If policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.

[ See a collection of political cartoons on the budget and deficit.]

In my Center on Budget and Policy Priorities analysis, I draw on Congressional Budget Office analysis to sketch the beginnings of how they might do that:

[A] cost-effective way to continue using the tax cuts to shore up the weak economy would be to extend the middle-class tax cuts for a year or two, allow the upper-income tax cuts to expire, and extend the tax-credit expansions targeted on low- and moderate-income households. Such an approach would provide the most "bang-for-the-buck" in terms of supporting the economic recovery in 2013-14 without seriously compromising long-term fiscal sustainability.

While they are at it, policymakers should not neglect the unemployed by letting federal unemployment insurance benefits expire.