Chairman Casey, Vice Chairman Brady, and Members of the Committee, thank you for inviting me to appear today to discuss the effects of the fiscal cliff on the economy.
The “fiscal cliff,” that is, the combination of automatic spending cuts and the end of multiple temporary tax cuts scheduled to expire at the end of this year, is estimated by the CBO to reduce the federal deficit in fiscal year 2013 by around $607 billion, or $560 billion after taking into account its effect on the overall economy1. Around two thirds of the $607 billion in savings stem from four tax increases that are scheduled to take place in 2013.
This dramatic budgetary shift would, of course, have a very large impact on the overall economy. In this testimony, I examine the potential short and long term effects of failing to address the fiscal cliff, and then relate lessons from the economics literature on the likely impact of various policy responses to the coming deadline.