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April 18, 2014

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Analysts say fiscal cliff cuts would mean recession

WASHINGTON — Austere "fiscal cliff" tax increases and federal spending cuts set for the end of the year would send the economy back into recession and cause a spike in the jobless rate to 9.1 percent by next fall, congressional budget analysts said Thursday.

The tax and spending changes, which a lame-duck session of Congress will dig into next week, would cut the federal deficit by $503 billion through next September, said the Congressional Budget Office report. But the adjustments also would cause the economy to shrink by 0.5 percent next year.

The report, updating an analysis from last May, comes as a newly re-elected President Barack Obama and Congress seek ways to avert or at least ease possible damage from the scheduled changes. All sides are promising cooperation, but many difficult decisions await and the politics of raising tax revenue and cutting federal benefits programs is exceedingly tricky.

The new study estimates that the nation's gross domestic product would grow by 2.2 percent next year if the Bush-era tax rates were extended and would expand by almost 3 percent if Obama's 2 percentage point payroll tax cut and current jobless benefits for the long-term unemployed are extended.

All sides want to avoid the automatic austerity plan, which is a one-two punch of expiring tax cuts and major across-the-board spending cuts to the Pentagon and domestic programs. It is the looming punishment for previous failures of a bitterly divided Congress and White House to deal with the government's spiraling debt or overhaul its unwieldy tax code.

The largest component of the changes — dubbed a "fiscal cliff" to be avoided if possible — comes with the expiration of tax cuts enacted in 2001 and 2003 and extended two years ago after Obama's drubbing in the 2010 midterm elections. Extending the full range of Bush tax cuts would cost the government $330 billion through the September end of the 2013 budget year.

Republicans want to temporarily renew all of the Bush tax cuts, but Obama wants to hike the top two income tax rates to Clinton-era levels. The top tax rate is now 35 percent; Obama would raise that to 39.6 percent. If the rival sides can't enact a bargain by January, the full menu of tax cuts would expire.

The spending cuts would be imposed as a consequence of the failure of last year's deficit-reduction "supercommittee" to reach agreement. There are other elements, chiefly a 2 percentage point cut in payroll taxes orchestrated by Obama and unemployment benefits for the long-term jobless that would disappear.

Extending the payroll tax relief and renewing the long-term unemployment benefits would add another $108 billion to the deficit through September. It's unclear whether lawmakers will seek to avert that in the upcoming deal-brokering.

"Today's CBO report underscores the need to prevent the so-called fiscal cliff from harming American families and businesses, and to instead enact a balanced, long-term deficit reduction plan," said top House Budget Committee Democrat Chris Van Hollen of Maryland. "We must take a balanced approach that includes cuts to spending and cuts to tax breaks for millionaires and special interests that we can no longer afford."

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  1. What the? "Back into recession?" When did we get out of the recession?

    This column lost me at that foolish/lying line.

  2. Bob: The recession officially ended in June 2009.

  3. LOL I like how a staff member actually comments to provide a date in time as to when the recession "officially" ended. Is that serious? Or a joke? LOL bahahaa.

  4. I mean I guess you can only go on GDP but really, not necessarily an overall best indicator.

  5. It seemed as if the "bad news" slacked a bit the last few months..
    But Now..I was shocked this week to find out a friend..college graduate..was filing for bankruptcy
    Two other friends..tech workers with excellent resumes are being laid off the beginning of the year..
    My neighbor is closing her small business
    I did some research as I like financial stuff and I believe that no matter what happens with the "fiscal cliff"..the eoncomy is going to tank.
    I believe many employers and small business people were just "hanging in there" until after the election..
    Another small business owner called me last night and said he was very worried and we talked about what might to done to improve his financials..
    So..
    I looked at the stock market and it is going down..and commodities..except for gold ..are not going up..Bonds are not going up (as far as I could see)
    So...it is a lack of confidence..and people are pulling out..I thought of saving some for a rainy day and I think I will buy gold rather than save dollars..
    I don't trust the government (taxes, regulaions, debt reduction etc) and I don't trust the dollar (QE2 eternity)
    If I am right..that means the economy is going to tank and stay tanked for quite a while..No Confidence
    I may not be right but..this is the report from my part of the world..another downturn that has nothing to do with "fiscal cliff."

  6. Obama and the Democratic Party congressional leaders need to set the agenda on what they believe should occur. Sell it to the Public. We should let the Bush tax cuts expire, then pass a similar tax cut for the bottom 98%. We should raise capital gains back to the historic number of 25%. They then should go back to the Simpson/Boles and see what can be acceptable for reductions. When you let the Bush Tax cuts end, pressure is on the Republican side to agree on the tax cut for the 98%.

  7. Don, not so. Let the tax cuts expire--and eliminate some of those refunds for those who don't pay income tax but have several dependents--so they get thousands in "refunds." Money bills (taxes) must start in the House of Representatives--with a Republic majority....

  8. Exactly what I want. Let the house try to put tax cuts together that will have agreement in the Senate. Tax cuts for the top 2% should not pass the Senate. Eventually the house will pass what Obama, and the american people want, if it does so much the better. If it does not the House is the fault. See 2014 election.