Economists Warn of Second Fiscal Cliff

Economists Warn of Second Fiscal Cliff

While discussions about the so-called fiscal cliff dominate the political world, there may be other factors on the horizon that could send America toward another fiscal cliff. Such issues arise no matter how Congress deals with the expiration of the Bush tax cuts and the mandated budget cuts during the lame duck session of Congress. 

According to the Washington Post

A payroll tax cut benefiting 160 million workers is scheduled to expire at the end of the year, as are unemployment benefits for millions of people. Also on tap are new taxes on the wealthy and cuts in tens of billions of dollars in domestic and defense spending that will occur regardless of the fiscal cliff.

Economists have noted these changes could “reduce growth by at least one percentage point and leave at least 1 million more people jobless.”

The payroll tax cut, which is scheduled to expire next year, was enacted in December of 2012 and lowered the Social Security tax from 6.2% to 4.2%, which gave families on average an extra $1,000. 

The government also, according to the Post, must “trim about $60 billion from domestic and defense spending next year” regardless of what occurs during the lame duck session of Congress.

Meanwhile, if unemployment benefits expire, consumer spending will go down, and this will be coupled with even more tax increases on upper-income earners because of Obamacare. 

According to Moody’s Analytics, together “these changes could do at least as much to slow the economy as any other government action in the past half-century.”

Some analysts, like Alex Brill of the American Enterprise Institute, do not favor approaches that “use to tax code as a turn-it-on, turn-it-off tool “for managing the quarter-to-quarter performance of the economy” and instead favored permanent tax policy reform. 

Mark Zandi, of Moody’s, also said the government should the payroll tax cut to expire even if it causes short-term pain. 

Analysts also noted if the U.S. government does not tackle the debt, consumers, companies, and the government could face higher borrowing costs.

After Standard & Poor’s downgraded America’s credit rating, the Post notes U.S. cannot afford another major agency to follow suit because “many types of investors, such as pension funds, cannot buy bonds if they do not carry the highest ratings of two agencies.”