Federal Reserve Chairman Ben Bernanke calls this confluence of events a “fiscal cliff.” Taken together, these policies would reduce ten-year deficits by over $6.8 trillion relative to realistic current policy projections – enough to put the debt on a sharp downward path, but in an extremely disruptive and unwise manner.
However, the worst case scenario would be for lawmakers to repeal the sequester and once again extend expiring debt-expanding policies without offsetting their costs.
If policymakers were to walk away from this potentially action-forcing moment to help them put the country’s debt on a sustainable path, it could lead to a loss of confidence in their ability to govern that could set off a dangerous chain reaction in markets. Statements from major credit rating agencies, especially Moody’s, have indicated that such action could result in downgrades of our debt. Downgrades aside, extending the policies currently in place would put our debt on an upward and ultimately unsustainable path.
The approaching fiscal cliff, therefore, represents both a challenge and an opportunity. The stakes are too high not to take advantage of it by enacting a thoughtful and gradual plan to stabilize the debt and put it on a downward path. Failure simply is not an option.
Goldwein is the senior policy director and Peuquet is the research director at the Committee for a Responsible Federal Budget, a non-partisan, non-profit organization committed to educating the public about issues that have significant fiscal policy impact. A new paper from CRFB explores the path needed to navigate between the near-term “fiscal cliff” and long-term mountain of debt.