Economy
3:53 am
Fri November 9, 2012

CBO: 'Fiscal Cliff' Could Put U.S. Back In Recession

Originally published on Fri November 9, 2012 11:46 am

Transcript

RENEE MONTAGNE, HOST:

Speaker Boehner also said he wants to work with the president to keep them from going over the fiscal cliff - higher taxes and spending cuts that take effect at the end of the year. The Congressional Budget Office warns of a new recession if Congress doesn't make changes. NPR's Scott Horsley has our daily look at the bottom line.

SCOTT HORSLEY, BYLINE: It's no surprise that if the government buys fewer fighter jets or pays fewer park rangers, there's less money flowing through the economy. Likewise, if the government collects more in income taxes, consumers have less money to spend. The new report from the CBO puts a price tag on those effects.

It says the automatic spending cuts and tax increases - known collectively as the fiscal cliff - would send the economy back into recession next year, and push unemployment up to 9.1 percent. On the flip side, taxing more and spending less would reduce the federal budget deficit. The CBO estimates the automatic changes would save an estimated $500 billion dollars in red ink next year.

Budget forecasters outline the tradeoffs between deficit reduction and economic pain for the each of the cliff's major components. It turns out, not every borrowed dollar the government spends is equally valuable to the economy, and not every tax dollar collected is equally harmful.

The CBO says preventing cuts to defense spending would provide the biggest economic boost: about a $1.20 in extra GDP for every dollar added to the deficit. Preventing cuts to other government spending would be worth about 90-cents per borrowed dollar. In contrast, heading off scheduled tax hikes is a fairly inefficient way to boost the economy, since consumers would probably not spend all the extra money in their pockets.

The CBO estimates extending tax breaks for everyone would add just 50-cents to the economy for every dollar in red ink. The bang for the buck would be slightly higher if taxes were allowed to rise on the wealthiest families. The report comes as policymakers look for ways to hit the brakes before they hit the fiscal cliff. Scott Horsley, NPR news, Washington.

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