How far over the ‘fiscal cliff’ could government go?
By Connie Cass
Associated Press
WASHINGTON (AP) — The dealmakers who warn that a year-end plunge off the “fiscal cliff” would be disastrous don’t seem to be rushing to stop it. Why aren’t they panicking?
For one thing, the Dec. 31 deadline is more flexible than it sounds. Like all skilled procrastinators, from kids putting off homework to taxpayers who file late, Washington negotiators know they can finagle more time if they need it.
That doesn’t mean delay would be cost-free. Stock markets might tank if 2013 dawns without a deal. But Americans could be temporarily spared many of the other ill effects if Congress and President Barack Obama blow past their deadline.
The Obama administration would have power to delay some of the tax increases and spending cuts that would officially take effect as January begins. Then, if an agreement is reached early in the year, it could be applied retroactively to wipe them out.
Some lawmakers even argue that briefly going over the cliff is the best way to force a compromise. The Obama administration on Wednesday indicated it would take the plunge if necessary to ensure that the wealthy end up paying higher tax rates.
Pushing the deadline too far is a risky strategy, however. The Congressional Budget Office predicts that the fiscal cliff policies, if left unchecked, would spark a recession later in 2013 and send the unemployment rate above 9 percent by fall.
How long could negotiators balk and bicker before putting the U.S. economy in jeopardy? The calendar becomes less and less forgiving as the weeks pass.
A procrastinator’s guide to pushing the deadline:
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DECEMBER
Democrats led by Obama and Republicans led by House Speaker John Boehner say it’s critical to reach a deal this month. Yet both sides appear dug in over taxes. And their two plans are far apart on how much to cut spending while the economy is still recovering from the last recession.
So far, Boehner said, “we’re nowhere.”
If compromise were easy for this bunch, they wouldn’t be in this jam. A good chunk of the fiscal cliff — the automatic spending cuts known as the “sequester” — is an artificial deadline created by Congress in hopes of forcing itself to come up with a deficit-cutting plan. It arrives at the same time as the expiration of the George W. Bush-era income tax cuts and other temporary tax breaks scheduled to end unless Congress extends them. Together the taxes and cuts would equal close to $700 billion in deficit reduction over 2013.
Congress could vote to override all this and essentially freeze taxes and spending where they are now while the economy heals. But Obama and lawmakers, especially Republicans bent on budget-cutting, see the fiscal cliff as the critical moment to overcome inertia on the nation’s long-term debt crisis.
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JANUARY
If there’s no deal in December, the economy won’t fall off a cliff on New Year’s Day. But it probably will begin a bumpy downhill ride.
The new Congress that convenes Jan. 3 won’t look much different from the one that’s deadlocked now, divided between a Republican-controlled House and a Democratic-dominated Senate. The lawmakers would feel more heat, however.
Higher taxes for nearly everyone and across-the-board spending cuts would already be law.
“People will get more nervous day by day,” said Mark Zandi, chief economist at Moody’s Analytics. Still, he thinks the economy could weather a few more weeks of uncertainty as long as negotiators appeared to be working toward an agreement.
If the Bush-era tax cuts expired, that would raise income taxes for the average middle-class family by $2,200 over the course of 2013, the White House says. That’s about $42 per week, probably not enough to curtail spending right away and deal an immediate blow to the economy, economists say.
Plus, taxpayers might never have to ante up. The Treasury Department sets withholding tables that determine how much tax comes out of Americans’ paychecks. It could hold off raising the withholding if a deal seems to be in the works, said Roberton Williams, a senior fellow of the private Tax Policy Center.
Both Republicans and Democrats say they don’t want middle-class taxpayers to pay higher tax rates. They disagree over whether to let tax rates rise on individual income above $200,000, as Obama wants.
Other far-reaching tax changes are more likely to go ahead in January. For example, although Obama proposes extending the temporary Social Security payroll tax reduction, support for that has been weak. So more money might start coming out of workers’ pay, whether or not a fiscal cliff deal is reached. That’s another $1,000 over the year, or a little more than $19 per week, from a worker making $50,000.
As for the sequester, the White House can direct the Pentagon and federal agencies to husband their resources for a while and hold off on some spending cuts while negotiations continue.
“The more there’s an anticipation that there’s actually an agreement in the works, the less of an impact any of this should have,” said Chad Stone, chief economist for the liberal Center on Budget and Policy Priorities. He argues that it’s OK to miss the fiscal cliff deadline if necessary to achieve a well-designed agreement.
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FEBRUARY
What might finally get procrastinators moving if nothing else has? Fear of the United States defaulting on its debts for the first time ever.
Unless Congress acts, the government is expected to hit its legal borrowing limit of $16.39 trillion by the end of December. Treasury Department maneuvers should hold off a default for
a couple more months, until late February or early March, private economists say.
Congress could raise the debt limit anytime now, if lawmakers agreed, before resolving the fiscal cliff. But it’s being discussed as part of the bigger tax-and-spending package. The White House says raising the debt limit must be included in the deal; Boehner says the Republicans want any increase in the government’s borrowing to be matched by spending cuts.
Remember the last debt limit showdown? The government came within a whisker of default in August 2011 before a compromise was reached. The financial markets reeled. Standard & Poor’s downgraded the nation’s credit rating.
Again coming to the edge of default — an economic crisis that scares investors more than the fiscal cliff — would probably send markets plummeting and finally shake up lawmakers, too.
“That’s a pretty scary thing to watch,” Zandi said. “For a policymaker that’s real motivation.”
