Austin American-Statesman

U.S. could handle a brief fall over ‘cliff’

Cliff

- By Christophe­r S. Rugaber

WASHINGTON — The economic threat that’s kept many Americans on edge for months is nearing reality — unless the White House and Republican­s cut a budget deal by New Year’s Day.

Huge tax increases. Deep cuts in domestic and defense programs. The likelihood of sinking stock prices, reduced consumer spending and corporate layoffs. The risk of a recession within months.

Still, the start of 2013 may turn out to be far less bleak than feared. For one thing, President Barack Obama and members of Congress may strike a shortterm agreement before the New Year that postpones spending cuts until spring.

Even if New Year’s passed with no deal, businesses and consumers likely would not panic as long as some agree-

ment seemed imminent. The $671 billion in tax increases and spending cuts could be retroactiv­ely repealed.

And the impact of the tax increases would be felt only gradually. Most people would receive slightly less money in each paycheck.

“The simple conclusion that going off the cliff necessaril­y means a recession next year is wrong,” says Lewis Alexander, an economist at Nomura Securities. “It will ultimately depend on how long the policies are in place.”

It’s always possible that negotiatio­ns between Obama and Republican congressio­nal leaders will collapse in acrimony. The prospect of permanent tax increases and spending cuts could cause many consumers and businesses to delay spending, hiring or expanding.

Without any agreement at all for months, the fiscal cliff would cause the U.S. economy to shrink 0.5 percent in the first half of 2013 and fall into recession, the Congressio­nal Budget Office estimates. But most economists expect a deal, if not by New Year’s then soon after.

“The atmosphere is more important than whether the talks spill” into next year, said Paul Ashworth, an economist at Capital Economics.

Here’s why many are optimistic that a brief fall over the cliff wouldn’t derail economic recovery:

Though the fiscal cliff would boost taxes by $586 billion for all of 2013, the tax hit for most people would be modest at first. The expiration of Social Security and income tax President Barack Obama and Speaker John Boehner may reach a short-term deal before the new year, averting panic if a bigger deal seems imminent. cuts would be spread throughout 2013. For taxpayers with incomes of $40,000 to $65,000, paychecks would shrink an average of about $1,500 next year. That would be a significan­t bite over the full year, but the initial hit would be $130 in January, according to the nonpartisa­n Tax Policy Center.

About a third of the tax increases wouldn’t touch most Americans. Some would hit businesses. Others, such as higher taxes on investment income and estates, and the expiration of middleinco­me tax credits, wouldn’t come due until Americans filed their 2013 taxes in 2014.

The Internal Revenue Service has delayed any increases in tax withholdin­g that would otherwise kick in. Without a deal, the top income tax rate for single people with taxable income between about $36,000 and $88,000 would rise to 28 percent from 25 percent. But that won’t start to reduce Americans’ paychecks in early January, even if no deal is reached by then.

About $85 billion in spending cuts to defense and domestic programs would take weeks or longer to take effect. That means government agencies wouldn’t cut jobs right away.

If a short-term agreement is struck, some taxes would probably still go up. These would include a 2 percentage point cut in Social Security taxes that’s been in place for two years. Its expiration would cost the typical household about $1,000 a year. With income gains sluggish, that could dampen consumer spending.

And a temporary deal that delays some hard decisions could reduce business and consumer confidence. It would also mean:

Extended unemployme­nt benefits would end for 2 million people.

The stock market would probably drop, though maybe not by much.

The expiration of the Social Security tax cut and the end of emergency unemployme­nt benefits would likely shave 0.7 percentage point off economic growth next year, the CBO estimates.

If no deal at all was reached by January and budget talks dragged on, many businesses might put off investment or hiring. That’s why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.

The gravest scenario would be if the budget talks collapsed and the tax increases and spending cuts appeared to be permanent.

In that case, Macroecono­mic Advisors warns that the Dow could plunge up to 2,000 points within days.

The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates Joel Prakken, an economist at Macroecono­mic Advisors. That compares with an estimated 1.9 percent growth rate if a deal is reached. The CBO forecasts unemployme­nt would rise to 9.1 percent from the current 7.7 percent.

And if the crisis is resolved the boost to business and consumer confidence would encourage hiring and spending.

“We could end up with a much more robust recovery than anybody’s envisioned” if a deal is reached, said David Cote, CEO of Honeywell Internatio­nal.

 ??  ?? Boehner
Boehner
 ??  ??

Newspapers in English

Newspapers from United States