The fast-approaching combination of tax hikes and spending cuts that could throw the country into a recession might instead gently nudge the country into decline — if at all, experts say.
At the end of this year, a series of tax breaks expire at the same time cuts to government spending take effect, a combination known as a fiscal cliff that could throw the country into a recession if left unchecked by Congress.
Successful aversion of the fiscal cliff could still mean adjustments to taxes and government spending, which could dampen growth next year.
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
But the worst-case scenario, under which Congress fails to agree on a way to steer the country away from the cliff, wouldn’t result in a major shock to the economy, but would instead result in gradual and even reversible losses.
“The slope would likely be relatively modest at first,” Chad Stone, the chief economist at the Center on Budget and Policy Priorities, a research group based in Washington, wrote in a recent analysis, according to The New York Times.
“A relatively brief implementation of the tax and spending changes required by current law should cause little short-term damage to the economy as a whole.”
The nonpartisan Congressional Budget Office estimates that the economy could contract by 0.5 percent next year and unemployment rates would rise to around 9 percent by late 2013 if lawmakers fail to steer the country away from the fiscal cliff.
The Tax Policy Center, a Washington research group, estimates that the average household would see taxes climb by $3,500 and its after-tax income drop 6.2 percent.
While Congress must agree on taxes and spending cuts, the Treasury Department can take certain measures to adjust the timing of any tax hikes.
“It would be quite easy,” said Eric Toder of the Tax Policy Center, The Times added.
“Technically easy. I don’t know about politically easy.”
Still, in the end, congressional agreements rarely come easy and are often delayed by political brinkmanship.
Multilateral financial institutions have stressed that the global economy depends on successful avoidance of the fiscal cliff.
“In the United States, it is imperative to avoid excessive fiscal consolidation (the fiscal cliff) in 2013, to raise the debt ceiling promptly and to agree on a credible medium-term fiscal consolidation plan,” the International Monetary Fund said in an analysis.
The IMF added failure to prevent tax hikes and spending cuts from striking at the same time could shave more than 4 percent from U.S. gross domestic product in 2013.
Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation
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