Policy Documents

Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013

Congressional Budget Office –
May 1, 2012

If the fiscal policies currently in place are continued in coming years, the revenues collected by the federal government will fall far short of federal spending. That gap will grow over time as the aging of the population and the rising cost of health care continue to boost federal spending under current policies. Therefore, putting the budget on a sustainable path will require significant changes in spending policies, tax policies, or both.

Policymakers face difficult trade-offs in deciding how quickly to implement policies to reduce budget deficits. On the one hand, cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect. On the other hand, implementing spending cuts or tax increases abruptly would give families, businesses, and state and local governments little time to plan and adjust. In addition, and particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.

Under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending—a development that some observers have referred to as a “fiscal cliff.” The recent or scheduled expirations of tax provisions, such as those that lower income and payroll tax rates and limit the reach of the alternative minimum tax (AMT), will boost tax revenues considerably in 2013 compared with the sums that will be collected in 2012. The automatic enforcement procedures established in the Budget Control Act of 2011 (Public Law 112-25) will lower spending in 2013 compared with outlays in 2012. And other provisions of law will generate additional deficit reduction in 2013.