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Economic Effects of Reducing the Fiscal Restraint that is Scheduled to Occur in 2013 1 (May 22, 2012)

handle is hein.congrec/cbo10735 and id is 1 raw text is: MAY 2012 Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013 If the fiscal policies currently in place are continued in coming years, the revenues collected by the federal gov- ernment will fall far short of federal spending. That gap will grow over time as the aging of the population and the rising cost of health care continue to boost federal spend- ing under current policies. Therefore, putting the budget on a sustainable path will require significant changes in spending policies, tax policies, or both. Policymakers face difficult trade-offs in deciding how quickly to implement policies to reduce budget deficits. On the one hand, cutting spending or increasing taxes slowly would lead to a greater accumulation of govern- ment debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect. On the other hand, implementing spending cuts or tax increases abruptly would give families, businesses, and state and local governments little time to plan and adjust. In addition, and particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion. Under current law, the federal budget deficit will fall dra- matically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reduc- tions in spending-a development that some observers have referred to as a fiscal cliff. The recent or scheduled expirations of tax provisions, such as those that lower income and payroll tax rates and limit the reach of the alternative minimum tax (AMT), will boost tax revenues considerably in 2013 compared with the sums that will be collected in 2012. The automatic enforcement proce- dures established in the Budget Control Act of 2011 (Public Law 112-25) will lower spending in 2013 compared with outlays in 2012. And other provisions of law will generate additional deficit reduction in 2013. Taken together, CBO estimates, those policies will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013. The resulting weakening of the economy will lower taxable incomes and raise unemployment, gen- erating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013, CBO projects. If measured for calendar years 2012 and 2013, the amount of fiscal restraint is even larger. Most of the pol- icy changes that reduce the deficit are scheduled to take effect at the beginning of calendar year 2013, so budget figures for fiscal year 2013-which begins in October 2012-reflect only about three-quarters of the effects of those policies on an annual basis. According to CBO's estimates, the tax and spending policies that will be in effect under current law will reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013 (with the resulting economic feedback included, the reduction will be smaller). Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO 1. See Congressional Budget Office, Udated u P ro : F iscalYear 2012 to 2022 (March 2012). CBO's baseline budget projections and the analysis in this letter are based on the assump- tion that the statutory limit on federal debt is increased as necessary to accommodate projected spending and revenues. Note: Numbers in the text and tables may not add up to totals because of rounding. X x x z :

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