The “Fiscal Cliff”: Macroeconomic Consequences of Tax Increases and Spending Cuts

"A major policy concern for Congress is when and whether to address the “fiscal cliff,” a set of tax
increases and spending cuts that would substantially reduce the deficit in 2013. In projections
made in March 2012 by the Congressional Budget Office (CBO), this fiscal restraint, constituting
5.1% of output in 2013, would reduce growth to 0.5% from 4.4%. Unemployment would increase
by two million. In August, updated estimates projected growth at a negative 0.5%.

Policy choices with respect to the fiscal cliff are difficult because of the conflict between shortrun
and long-run economic and budgetary objectives. In the short run, the reduction in demand
from the reduced budget deficits could damage an already fragile recovery. In the longer run,
however, deficit reduction is needed to address a projected unsustainable debt level.."