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Going off the "fiscal cliff" at the end of the year by allowing the income tax rate cuts first passed under President Bush to expire and allowing the so-called sequester to reduce spending across-the-board would reduce the deficit. But it would also throw the economy into a double-dip recession. According to the Congressional Budget Office, in fact, going off the fiscal cliff would shrink the economy by almost 4 percent in the first quarter of 2013 and drive the unemployment rate up to 9.1 percent in the next year.
These abrupt and reckless policies would severely dampen any hope for short-term economic growth that we need to strengthen the economy and put people back to work. An intelligent plan would do more to protect short-term growth by phasing in fiscal restraint gradually to give markets, businesses, and households confidence that we will pay down our debt and certainty over how it will be done.
In the long run, doing nothing to avoid the fiscal cliff would reduce federal debt. But it would also to provide a policy mix favorable to smart economic growth. Going over the cliff would raise marginal tax rates and cut investments thereby stifling long-term growth, and it would do so without addressing the real drivers of our debt. To be sure, continuing to let the debt rise uncontrollably would be the worst long-term outcome; but going over the cliff is certainly not the right way to promote long-term growth.
A deal to replace the cliff should not only protect the fragile recovery in the short-term, but prioritize growth in the long-term. It should cut spending which inhibits or does little to help growth while protecting important investments that are critical to long-term growth. It should reform the tax code to lower corporate and individual rates, but still raise more revenue through broadening the base. Finally, it should encourage a stronger, larger workforce through gradual increases in the retirement age.
Short and long-term growth policies do not have to be at odds with short and long-term deficit and debt reduction. Both can and should be included as the basis for a bipartisan solution to prevent the fiscal cliff and fix the debt.
Marc Goldwein is the senior policy director of the Committee for a Responsible Federal Budget.