GovSpeak: “The Fiscal Cliff”

“Fiscal cliff,” a phrase coined by Federal Reserve Board Chairman Ben Bernanke, is shorthand for the “many major fiscal events” that could happen simultaneously at the end of this year and in January 2013. Congress faces a serious conundrum: it can either let current policy (including automatic cuts in federal spending through sequestration, the expiration of the Bush-era tax cuts, and the payroll tax cut) go into effect on January 2 or it can agree to a balanced deficit reduction plan and avoid sequestration. With Democrats looking to enact a combination of spending cuts and tax increases while Republicans seek to cut spending without raising taxes, passing such a plan requires a level of compromise that will be difficult—if not impossible—to achieve, particularly in this election year.

The effects of the fiscal cliff on the economy—and commercial real estate—could be extreme, because it would result in a severe fiscal contraction during a weak recovery. The Congressional Budget Office (CBO) has estimated that the combination of higher taxes and spending cuts could cut gross domestic product (GDP) by four percentage points next year and likely would throw the country back into recession.

How will this situation play out? Although President Obama, House Speaker John Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nev.) announced last week (Monday, July 30) that they had agreed to a six-month continuing resolution that will avoid a government shutdown at the end of FY2012 (on September 30), the outlook remains bleak. The most likely outcome is that Congress will postpone any additional action until after Election Day, leaving us with another four or five months of economic uncertainty and painfully slow growth—as well as a legislative “perfect storm” in December, when a lame duck Congress would need to pass legislation to increase the debt ceiling and stave off sequestration. Although everyone seems to agree that sequestration is bad policy—Senator Lindsey Graham (R-S.C.) called it “the dumbest idea” yesterday on CNN’s “State of the Nation”—nobody is optimistic about Congress’s ability to compromise on a solution. We therefore expect to be talking about the impending fiscal cliff for quite a while.