The U.S. Fiscal Cliff: Three Things to Know

December 13, 2012

The U.S. Fiscal Cliff: Three Things to Know
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Budget, Debt, and Deficits

The U.S. federal tax increases and spending cuts due to take effect at the end of 2012 have raised concerns over the future of the U.S. economic recovery. CFR adjunct senior fellow Peter R. Orszag highlights three things to know about the approaching fiscal cliff:

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  • Short-term unemployment: "We’re getting to do very little to bring down the unemployment rate in 2013, even though that would be desirable," Orszag says. It is unlikely that a deal between Republicans and Democrats to avoid the fiscal cliff will include significant additional government investments in infrastructure, he says.
  • Medium-term deficit reduction: Orszag expects that some steps will be taken in a fiscal cliff deal to reduce the U.S. deficit over the next decade. "The thing to look for there is how much is done through real measures, like raising marginal tax rates, and how much is done through further reductions and discretionary spending caps without any supporting detail," he says. "The more of the latter, the less real the agreement is."
  • Long-term deficit: While some measures may address deficit reduction in the medium term, Orszag emphasizes that different measures are required to address long-term deficits. The deal is "very unlikely to do that much to bring down the long-term deficit over the next seventy-five years or so, which is arising mostly from Medicare, Medicaid, Social Security, our entitlement programs," he says.

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