* Up to $800 bln in 10-year deficit reduction versus tax cut
* $4.6 trillion more debt compared to full 'cliff' dive
* Short-term economic pain averted, less GDP growth in later
By David Lawder
WASHINGTON, Jan 4 So does Congress' landmark
deal to avert the "fiscal cliff" by canceling tax hikes on most
Americans increase or decrease long-term U.S. budget deficits?
The answer is a definitive "yes," the Congressional Budget
Office said on Friday. It all depends on the comparison. And by
the way, it also helps - and hurts - the economy.
As it said earlier this week in its official budget scoring
of the legislation passed on Jan. 1, the deal adds $4 trillion
to deficits over a 10-year period compared to allowing all
income tax rates to jump back to their pre-2001 levels and
allowing automatic spending cuts to bite -- effectively a leap
off the fiscal cliff.
Add in the increased debt service costs through 2022, and
you have $4.6 trillion in new debt burden. The main culprit is
simple: the legislative deal brings in less revenue than called
for by tax laws that would have reinstated the old rates.
But few in Washington believed it was realistic to allow a
full return to Clinton-era tax rates, sharply lower Medicare
payments to doctors and a failure to stop the dreaded
alternative minimum tax from ensnaring ever-larger numbers of
So the CBO last year came up with an alternative scenario,
which assumed that all tax rates were left unchanged and the AMT
indexed for inflation. Had this been enacted, deficits would
have risen $4.5 trillion, or $5.2 trillion including debt
service costs, CBO estimated in August.
After making some adjustments in the agency's calculations
due to the fiscal cliff legislation, CBO director Doug Elmendorf
said in a blog posting that the deal would produce 10-year
budget savings of $600 billion to $700 billion compared to this
alternative tax-extension scenario.
Add in lower debt service costs, and the savings would be
$700 billion to $800 billion.
CBO also had predicted that going over the fiscal cliff had
dire consequences for the economy, plunging it back into
recession. This would have caused U.S. gross domestic product to
shrink by 0.5 percent in 2013 - a huge plunge from Federal
Reserve forecasts of 2.3 percent to 3.0 percent growth.
An economy in recession generates less tax revenue and
prompts higher spending on unemployment benefits, which widens a
deficit and forces more borrowing.
But due to this week's deal, the CBO's estimate is now back
in the black, with the office expecting 2013 GDP growth of
around 2.5-2.75 percent. This could decline due to some further
fiscal tightening still on the books for this year, however.
The CBO's analysis does not include any further spending
cuts that Congress may make in the next two months as a looming
battle over the federal debt limit heats up.
Longer term, however, CBO estimates that the fiscal cliff
deal will reduce GDP output compared to allowing all of the tax
rates to snap back to Clinton-era levels.
While some short-term pain will be avoided, it will do
little to halt the growth of U.S. debt in the long run. The debt
service costs and the lower national savings and reduced capital
stock associated with this will eventually start to sap economic
growth, the CBO said.
By contrast, the CBO had previously predicted that the
greater amount of deficit reduction achieved by going over the
fiscal cliff would start to pay dividends in higher growth by
the end of the decade.