The Fiscal Cliff: Even Scarier Than We Thought

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By Deborah Solomon

Halloween may have come and gone, but those still looking for a good scare should read two new Congressional Budget Office reports on the U.S.'s dire fiscal straits.

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. Allowing the pending $607 billion in spending cuts and tax increases to take effect, the CBO warns, will shave real gross domestic product by 0.5 percent in 2013, with output declining in the first half of the year and growing modestly in the second half.

Yet the CBO makes 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 a second CBO report highlights the incredibly uncomfortable policy choices awaiting the U.S. To shrink the deficit in 2020, the U.S. has two options: Cut benefits like Social Security and Medicare or require "large numbers of people to pay more in taxes."

If the nation wants to keep tax revenues as 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.

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

"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 policies now in place."

This won't come as news to the Barack Obama administration and Republicans on Capitol Hill, who must now engage in the unpleasant task of determining how to fix our 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 about it: Getting the nation's fiscal house in order will require tough choices, shared pain, including higher taxes, and a revamp of programs Americans rely on at the most vulnerable point in their lives.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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-0- Nov/08/2012 22:34 GMT