FT Alphaville " That US fiscal cliff hangs over a pile of recessionary rocks below The fiscal cliff and "Taxmageddon" are terms for what might happen at the end of this year, when various US tax cuts and benefits expire, and the automatic "sequestration" spending cuts agreed as part of last year's debt ceiling/Super Committee deal are due to kick in. Cardiff explained it in more detail back in November if you want a refresher on the scale and messiness of it all. There have been several estimates of how this might play out - Nomura for example forecast that the expiration of the Bush tax cuts alone would reduce GDP in 2012 by 1.5 percentage points. Now the Congressional Budget Office, a non-partisan agency, has published its own analysis, which paints a picture of all of the fiscal restraint measures and expiring tax cuts shaving a massive 4 percentage points off GDP growth in 2013, making for a recessionary first half: Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects - with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. That's even with some of the multiplier effects being delayed - for example, households might not react to the reductions in the child tax credit until tax return time in 2014, the CBO points out in its full report [PDF]. As the CBO analysts write, Congress could (in theory, we'd add) eliminate or reduce the fiscal restraint measures scheduled for next year, but that would increase long-run costs. Or they could let the cuts and tax increases go ahead, which would harm short-term growth and risk recession. And there's a middle way: Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period. Which sounds like a really nice, sensible approach to policy -and one which has almost no chance of actually being agreed in the current political climate, particularly in the scarce few weeks the lame duck Congress will have after this year's November election. Meanwhile, we won't have to wait until 2013 data comes in to see how this begins to play out: the CBO expects some of the effects of the 2013 fiscal cliff will be felt in the second half of this year, as households change spending in anticipation: Although quantifying those anticipatory effects is difficult, CBO estimates that they will reduce the growth of real GDP by about 0.5 percentage points at an annual rate in the second half of 2012. Related links: Lame duck paralysis and fiscal-cliff-mageddon - FT Alphaville What awaits you, Mr President (-elect)? - FT Alphaville This entry was posted by Kate Mackenzie on Wednesday, May 23rd, 2012 at 2:28 and is filed under Capital markets. Tagged with fiscal cliff, fiscal debt, fiscal policy, lame duck, tax cuts, US congress, US elections, US politics.