You are here
The Fiscal Cliff is an opportunity for long-term action
A series of sudden, drastic changes to our nation's fiscal policies are slated to take place automatically at the end of this year — what many are calling the "Fiscal Cliff." These automatic budget changes do not effectively address our long-term fiscal challenges, and their immediate implementation could hurt our fragile recovery. But the Fiscal Cliff presents an opportunity for action — instead of allowing our economy to go over the Fiscal Cliff, leaders should seize this opportunity to pass a comprehensive, bipartisan plan to deal with our long-term structural debt.
What exactly are the policy events around the Fiscal Cliff? They include:
- The expiration of tax provisions. At the end of the year, the tax cuts that were enacted in 2001 and 2003, and extended in 2010, will expire — along with a number of other temporary tax provisions. This would mean higher taxes for nearly all taxpayers.
- Automatic spending cuts. Across-the-board spending reductions, which total $66 billion next year and $1.2 trillion over the next ten years. About half of the reductions will come from defense and half from nondefense programs that support areas such as education, science and technology, and national parks. Many of these cuts are arbitrary, and few of them address the long-term drivers of spending growth.
- The expiration of the debt ceiling. In addition to automatic spending cuts and tax increases, the Treasury Department expects that the federal government will be hitting the debt limit again in early 2013. Knowing that last year's debt limit fight cost the U.S. at least $1.3 billion,1 it will be imperative for Congress and the president to work together to reach agreement in a timely fashion.
- Reduced payments to doctors. Unless the law is changed, Medicare payments to doctors will be reduced next year by 27 percent. Lawmakers have prevented these cuts in the past because of concerns that some doctors may stop seeing Medicare patients if payment rates are too low.
While allowing all of these events to occur would indeed significantly reduce the nation's deficits — by 5 percent of GDP in 2013 — going over the Fiscal Cliff is not a good way to reduce our long-term debt burden. It does not meaningfully address the real drivers of our debt, and would hurt the economy — CBO forecasts that immediate tax increases and sharp, sudden spending cuts would push the United States into recession in the first half of 2013. Unemployment could increase by up to a million jobs.2 According to Bloomberg Businessweek,3 business leaders are already delaying hiring and spending in anticipation of an economic slowdown at the end of this year.
Washington must not avoid the tough fiscal policy decisions. Instead, policymakers should use this opportunity to fix our fiscal policy for the long term. We need a plan that will provide clarity and actually help our economy — a comprehensive plan to reduce long-term deficits that can be implemented gradually and steadily. That kind of confidence-building measure would aid our economy today and put us on the path to long-term fiscal health for the future.
Now it's up to both parties to demonstrate the leadership to get us there.
1 http://www.gao.gov/assets/600/592832.pdf