How Big is the Fiscal Cliff?
UPDATE: This blog has been updated to include CBO's brief about the fiscal cliff.
About a month ago, we reported our estimates of how much the fiscal cliff would hurt the economy over the next two years using our interpretation of multipliers from CBO and Mark Zandi. That estimate had the 3.6 percent of GDP fiscal impact of the cliff hurting growth by about two percent over the first seven quarters.
Considering the size of the cliff, it is not surprising that others have estimated what impact the cliff will have. Analysts at many different organizations have estimated what the fiscal and economic impact of the change in fiscal stance that will be taking place (see here for an in-depth look at Goldman Sachs' projections). These estimates will vary by what people consider to be part of the fiscal cliff and in what timeframe they are estimating the impact (which will be greatest in the first quarter of 2013). Also, not all the estimates have given both the economic and budgetary effect, instead giving just one or the other.
We have summarized these estimates in the table below, including our estimate for just one year (our original estimate was for two years). The shorthand that we used for the policies included in each estimate is detailed below as well. These policies are:
- The 2001/2003/2010 tax cuts ("tax cuts")
- The patch to the Alternative Minimum Tax ("AMT patch")
- The payroll tax cut and extended unemployment benefits ("jobs measures")
- The $1.2 trillion automatic sequester ("sequester")
- The override of the 30 percent physician payment cut ("doc fix")
- The many temporary tax extenders ("extenders")
- The temporary expensing of certain business investments ("expensing")
- The taxes taking effect in 2013 contained in the Affordable Care Act ("ACA taxes")
- The discretionary spending caps in the Budget Control Act ("BCA caps")
- The scheduled reduction of spending on overseas wars ("war drawdown")
In the table, we also present our original seven quarter estimates of the fiscal cliff (since multipliers are often given in a two year period) alongside our estimate of the effect over three quarters. We will detail the three quarter estimate in a follow-up blog soon.
|Various Estimates of the Fiscal Cliff|
|Budgetary Impact (billions or % of GDP)||Economic Impact (billions or % of GDP)||Policies Included||Timeframe|
|David Greenlaw (Morgan Stanley)||5%||2.5% to 7.5%*||Tax cuts, jobs measures, sequester, BCA caps, war drawdown, ACA taxes||2013|
|Goldman Sachs||4%||4%||At least tax cuts, sequester, jobs measures||2013|
|Bank of America Merrill Lynch||4.6%||N/A||Tax cuts, AMT patch, jobs measures, sequester, doc fix, BCA caps, tax extenders, ACA taxes, expensing, "other" programs||2013|
|IHS Global Insight||4.2%||N/A||Tax cuts, jobs measures, sequester||2013 Q1|
|CBO||3.8%||2.1%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes, expensing||2012 Q4-2013 Q3|
|CRFB (Three Quarters)||4.5%||2.4%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-Q3|
|CRFB (Original)||3.6%||2%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-2014 Q3|
|CRFB (Using Zandi)||3.6%||2.5%||Tax cuts, AMT patch, jobs measures, sequester, doc fix, tax extenders, ACA taxes||2013 Q1-2014 Q3|
Note: Sources are linked for each estimatewhere available
*Greenlaw states that the multiplier for the cliff would be in the 0.5 to 1.5 range. The economic impact represents that range.