It has so far been possible for American policy makers to blame the frosty US recovery on the chill blowing from the eurozone. It now turns out that Washington’s home-made policy mismanagement may well push the world’s largest economy into a double-dip recession next year.
The non-partisan Congressional Budget Office’s updated forecasts, published on Thursday, make for scary reading. It estimates that the size of the “fiscal cliff” – the deficit-cutting measures that coincide in coming into effect at the end of the year – is nearly $500bn, or more than 3 per cent of national income. This enormous anti-stimulus in one year alone (and further deficit reduction is to follow under current law) is almost comparable in magnitude with the administration’s stimulus package that pulled the US out of recession two years ago. Taking so much spending out of the economy may well keep public debt within bounds, but at the cost of a new downturn.
The cliff is a result of how Congress has lined up several policies for fiscal consolidation to hit at the same time. The most significant are the expiry of the 2001 Bush-era income tax cuts, a payroll tax suspension, and the “sequester”, the fiscal straitjacket Congress put on last year and vowed not to take off until it could compromise on a better deficit-cutting plan.