Fiscal Cliff 2013: We Could See a 3 Percent Drop in GDP if Washington Fails to Find a Solution


Washington is under increasing pressure to avert the impending fiscal cliff before the year is out, and that pressure just increased a bit for the Republicans in Congress. Economists predict that the combination of tax increases across all income levels and required government spending cuts would cause the slowly recovering U.S. economy to plunge back into a recession. If negotiations fail to save our budget from this fate, a new Pew poll released Tuesday shows, people will be more likely to blame Republicans in Congress for the devastation it wrecks upon the economy.

Just how bad could the impact of the fiscal cliff be? Moody’s analytics predicts it would cause a 3.53% decrease in economic growth as a percentage of GDP, through a combination of a wind-down of the recovery act, an end to a handful of tax provisions including the Bush-era tax cuts, and the spending cuts, as explained in this handy graphic. It would also result in tax increases across all earning levels, an impact sure to be felt in voter’s pocketbooks, and, in turn, in the ballot boxes.

Fifty-three percent of the public, as polled between Nov. 8 and 11, would place the blame on the shoulders of Republicans in Congress, compared to 29% on President Obama. This distribution remains roughly the same for Independents, who are so coveted in elections. This data should add the wake-up call that Republicans have been getting since Nov. 6 that they need to discontinue the obstructionist approach they have taken recently, since the public is clearly aware of it and ready to blame them for it. If Washington fails to reach a deal, it could hurt Republicans at the ballot box two years from now, potentially opening the way for more Democratic control in Congress.

Republicans on the hill have certainly not been oblivious to the pressure from the public, shown in this poll and more vocally in the election results, to not stand so uncompromisingly behind their principles while the economy suffers. Speaker John Boehner, in a press conference Wednesday after the election, suggested he and the GOP would be “willing to accept some additional revenues, via tax reform." Republican Senator Saxby Chambliss has endorsed plans that involve revenue increases, and says that the typical conservative hopes for an increase in revenue based on economic expansion is credible, especially since the Congressional Budget office, a non-partisan agency, does not include it when assessing budget measures.

These are not the only indications of a Republican softening. Yet more compromise – from both sides – will likely be needed, especially if Congress intends on proving wrong the 51% of people in the same Pew poll who believe that Obama and Republicans in Congress will not reach an agreement on the fiscal cliff before January 1.