Fiscal cliff: Scarier than we thought

Halloween may have come and gone, but those still looking for a good scare should read two new Congressional Budget Office (CBO) reports on the dire fiscal straits in the United States.

In one, the CBO warns that going over the fiscal cliff will plunge the nation back into recession next year and send unemployment skyrocketing to 9.1 percent. The CBO warned that the pending $607 billion in spending cuts and tax increases would shave real gross domestic product by 0.5 percent in 2013. Consequently the output will decline in the first half of the year and grow modestly in the second half.

Yet the CBO makes it clear that avoiding the fiscal cliff by keeping current policies in place is no long-term salve. It will send federal debt surging and “raise the risk of a fiscal crisis.” So what’s a cash-strapped nation to do? Spend now and cut later.

Yet, the second CBO report highlighted the incredibly uncomfortable policy choices awaiting the U.S. to shrink the deficit in 2020. The U.S. has two options, either cut benefits like social security and medicare or increase taxes. The report suggests that if the nation wants to keep tax revenues at a percentage of GDP at their historical average of about 17.9 percent, it must make “substantial cuts, relative to current policies, in the large benefit programs that aid a broad group of people at some point in their lives.” Keeping benefits largely unchanged would, likewise, necessitate large tax increases.

Moreover, for all the talk about cutting federal programs and closing loopholes, the CBO said that won’t be nearly enough to dig the U.S. out of the fiscal hole.

According to the report, changes in other federal programs can affect the size of the changes needed in taxes or large benefit programs, but they cannot eliminate the basic trade-off between those two parts of the budget. Ultimately, significant deficit reduction is likely to require a combination of policies, many of which may stand in stark contrast to the policies now in place. This won’t come as news to the Barack Obama administration and Republicans on Capitol Hill, who must engage in the unpleasant task of determining how to fix the budget mess. Any solution will require both approaches: higher taxes and benefit cuts. Utilizing both will somewhat blunt the impact taxpayers and beneficiaries would feel otherwise.

But make no mistake, getting the nation’s fiscal house in order will require tough choices, shared pain, including higher taxes and a revamp of the programs Americans rely on at the most vulnerable point in their lives.

* The author is a member of the Bloomberg View editorial board.

by Deborah Solomon