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No Easy Way Around the Fiscal Cliff

We've heard much about the "fiscal cliff" that might appear at the beginning of 2013 if lawmakers fail to act to curb the tax hikes and spending cuts that are slated by current law to kick in at that time.

The nonpartisan Congressional Budget Office noted recently that growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5% -- while the economy is projected to contract at an annual rate of 1.3 % in the first half of the year and expand at an annual rate of 2.3% in the second half. In other words, under current law, we would have a recession in the first half of 2013.

With that in mind, it seems that everyone is worried about the fiscal cliff. After all, that starts in just six months. It's not that simple, though, to just go back to where we were before these budget reduction efforts were enacted. There is a very valid reason for cutting the deficit, after all. And in that vein, the CBO did a separate study pertaining to the longer-run effects if we enact the laws that are most likely to help us avoid the fiscal cliff.

And those results aren't pretty, either. While lawmakers may want to cut spending and increase revenue a bit less abruptly than in the "cliff" scenario, the current trajectory of debt growth is well beyond unsustainable. First, with the fiscal cliff, our federal debt held by the public would gradually decline over the next 25 years, from an estimated 73% of GDP this year to 61% by 2022 and 53% by 2037. That's a good thing.

Here's what would happen if the fiscal cliff is avoided by lawmakers changing current law in the manner the CBO believes Congress might do: "Federal debt would grow rapidly from its already high level, exceeding 90% of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109% by 2026, and it would approach 200% in 2037." Ouch!

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