Policy Documents

Between a Mountain of Debt and a Fiscal Cliff

The Committee for a Responsible Federal Budget –
July 16, 2012

At the end of 2012 and the beginning of 2013, many major fiscal events are set to occur all at once. They include the expiration of the 2001/03/10 tax cuts, the winding down of certain jobs provisions, the activation of the $1.2 trillion across-the-board “sequester,” an immediate and steep reduction in Medicare physician payments, the end of current Alternative Minimum Tax (AMT) patches, and the need to once again raise the country’s debt ceiling.

At the end of 2012, we face what Federal Reserve Chairman Ben Bernanke calls a “fiscal cliff.” Taken together, these policies would reduce ten-year deficits by over $6.8 trillion relative to realistic current policy projections – enough to put the debt on a sharp downward path but in an extremely disruptive and unwise manner.

Gradually phasing in well thought-out entitlement and tax reforms would be far preferable to large, blunt, and abrupt savings upfront. Policies set to take effect at the end of the year could seriously harm the short term economy without making the changes necessary to address the drivers of our debt or strengthen the economy over the long-term.

However, the worst-case scenario would be for lawmakers to repeal the sequester and once again extend expiring debt-expanding policies without offsetting their costs.

If policymakers were to walk away from this potentially action-forcing moment to help them put the country’s debt on a sustainable path, it could lead to a loss of confidence in their ability to govern that could set off a dangerous chain reaction in markets. Statements from major credit rating agencies, especially Moody’s, have indicated that such action could result in downgrades of our debt. Downgrades aside, extending the policies currently in place would put our debt on an upward and ultimately unsustainable path.

The approaching fiscal cliff, therefore, represents both a challenge and an opportunity. The stakes are too high not to take advantage of it by enacting a thoughtful and gradual plan to stabilize the debt and put it on a downward path. Failure simply is not an option.