Tags: orszag | citigroup | fiscal-cliff | congress

Orszag: Congress Will Take US Over Fiscal Cliff, Deal With It Next Year

Wednesday, 05 September 2012 05:54 PM

U.S. lawmakers will allow the country to go over a fiscal cliff on New Year's Eve but quickly return in January and deal with tax increases and spending cuts striking at the same time retroactively, said Peter Orszag, vice chairman of global banking at Citigroup.

At the end of the year, the Bush-era tax cuts and other tax breaks expire at the same time that automatic cuts in government spending kick in, a combination known as a fiscal cliff that could send the country sliding into recession next year if left unchecked by lawmakers.

Don't expect lawmakers to address the cliff during this election year, but do expect them to try and address the problem retroactively after elections by adjusting the timing and scope of the adjustments as well as lifting the nation's borrowing limits to meet spending needs, Orszag said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

"I unfortunately think the most likely scenario is we actually go over the cliff, and then there's a deal that's cut in early or mid-January in which you combine a more progressive tax cut that what would have just expired with entitlement reform and simultaneously raise the debt limit," Orszag told CNBC.

The nonpartisan Congressional Budget Office has said failure to address the fiscal cliff will spark a recession, though that is not likely to occur, said Orszag, also former director of the Office of Management and Budget in the Obama administration.

"What they are saying is if you go over the cliff and stay there, that is such a fiscal constraint that that will cause a recession," Orszag said.

Some anxiety surrounding the cliff, coupled with fiscal changes and headwinds from Europe, may dampen growth, though recession is avoidable, especially of both parties act in a centrist manner.

"I think what's going to happen is probably early next year, not late this year but early next year if President Obama is reelected, you will have a big fiscal deal that gets cut," Orszag said.

"With a Republican house in that scenario and a Democratic president, it will be a centrist deal, and it has to happen because we've got some constraints that need to be lifted, and both sides know that. It's might get a little rocky before we get there but we will ultimately get there."

The Congressional Budget Office estimates that the economy could contract by 0.5 percent next year while unemployment rates would rise to around 9 percent by late 2013 if lawmakers fail to steer the country away from the fiscal cliff.

"I think the stakes of fiscal policy are very high right now," Congressional Budget Office Director Douglas Elmendorf said recently, according to the Associated Press.

"We have very serious budget challenges and very serious economic challenges in this country."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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