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Avoid the fiscal cliff recession but still cut spending, warns CBO

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Falling off the fiscal cliff this January would likely push the nation into a recession--but there are long-term economic concerns if the government fails to address mounting debt, says the Congressional Budget Office.

In a report (.pdf) published Nov. 8,  CBO says that there are no easy decisions facing lawmakers but warns of economic woes in both the short term and long term if they take an all-or-nothing approach and either legislate away all the impacts or allow the nation to fall off the fiscal cliff.

The cliff is a combination of sequestration, the Dec. 31 expiration of the Bush tax cuts, payroll tax holiday, middle class tax cuts from the stimulus, and unemployment benefits for long-term unemployment; expected cuts to Medicare providers' fees and a new Medicare surtax.

CBO says that if all of these efforts went into effect they would reduce the deficit by roughly $500 billion per year, but would also result in a gross domestic product drop of up to 2 percent, unemployment reaching 9.1 percent, and likely a new recession.

On the other hand, if Congress prevents all of these measures from expiring, CBO says the fiscal 2013 deficit will grow $500 billion more than if the cuts were to go through and another $700 billion more in 2014. In addition, a lack of budget tightening "would reduce the nation's output and income in the longer run relative to what would occur if the scheduled tightening remained in place."

The CBO suggests the government shift cuts from a cliff with a steep drop off to a downward slope in order to avoid a recession while still making headway into deficit reduction. It does not specifically spell out how to reach this path – it lists the pros and cons of a variety of steps – but suggests a balance of reducing entitlements, cutting spending, and raising new tax revenues.

A separate report (.pdf) from the CBO, also published Nov. 8,says the federal debt is currently greater than 70 percent of GDP. It notes that if all of sequestration and other cuts go into effect, this will drop to 58 percent of GDP by 2020 though slow GDP growth, but would reach as high as 90 percent by 2022 despite GDP growth if lawmakers maintain current policies and prevent sequestration and other cuts.

For more:
- read the CBO report on the coming fiscal cliff (.pdf)
- read the CBO report options for deficit reduction by 2020 (.pdf)

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