Macroadvisers on the Effects of the Fiscal Cliff

We’re often asked how much of a drag on growth is associated with each of the provisions of current law that usually are described as comprising the fiscal cliff. The table below presents such results for the four quarters of 2013 and the year as a whole in descending order of importance. These simulations were generated with MA/US, our recently updated macro model, assuming the model’s endogenous monetary offset but holding oil prices along the baseline path and making no judgmental adjustments in the model to other financial conditions. Each provision was simulated separately, so the total reported in the table excludes interaction effects between the provisions. The largest two items are — not surprisingly — the expiration of the Bush tax cuts (-1.15 percentage points of GDP growth over the year) and the spending sequester (-0.76 percentage point of GDP growth). At the bottom of the list, the new taxes enacted as part of the Affordable Care Act will subtract less than one-tenth of a percentage point from growth over 2013. In total, the maximum potential hit to growth from the fiscal contraction is 3.4 percentage points over the entire year, but more than 5 percentage points in the first half of the year. Our baseline forecast includes roughly 11/4 percentage points of the total possible hit to growth.


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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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