Experts: 'Cliff' fall may not derail economy

President Obama and members of Congress return to

President Obama and members of Congress return to Washington on Thursday to continue budget talks. (Dec. 19, 2012) (Credit: AP)

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The economic threat that's kept many Americans on edge for months is nearing reality -- unless the White House and Republicans cut a budget deal by New Year's Day.

Huge tax increases. Deep cuts in domestic and defense programs. The likelihood of sinking stock prices, reduced consumer spending and corporate layoffs. The risk of a recession within months.

Still, the start of 2013 may turn out to be far less bleak than feared. For one thing, the two sides may strike a short-term agreement before New Year's that postpones spending cuts until spring. President Barack Obama and members of Congress return to Washington Thursday.

Even if New Year's passed with no deal, businesses and consumers would not likely panic as long as some agreement seemed imminent. The $671 billion in tax increases and spending cuts could be retroactively repealed.

And the impact of the tax increases would be felt only gradually. Most people would receive slightly less money in each paycheck.

Without any agreement at all for months, the fiscal cliff would cause the U.S. economy to shrink 0.5 percent in the first half of 2013 and fall into recession, the Congressional Budget Office estimates.

But most economists expect a deal, if not by New Year's then soon after.

Here's why many are optimistic that a brief fall over the cliff wouldn't derail the economic recovery:

Though the fiscal cliff would boost taxes by $586 billion for all of 2013, the tax hit for most people would be modest at first. The expiration of Social Security and income tax cuts would be spread throughout 2013. For taxpayers with incomes of $40,000 to $65,000, paychecks would shrink an average of about $1,500 next year. That would be a significant bite over the full year, but the initial hit would be just $130 in January, according to the nonpartisan Tax Policy Center.

About a third of the tax increases wouldn't touch most Americans. Some would hit businesses.

The Internal Revenue Service has delayed any increases in tax withholding that would otherwise kick in. Without a deal, the top income tax rate for single people with taxable income between about $36,000 and $88,000 would rise from 25 percent to 28 percent.

About $85 billion in spending cuts to defense and domestic programs would take weeks or longer to take effect. That means government agencies wouldn't cut jobs right away.

A temporary deal that delays some hard decisions could reduce business and consumer confidence. It would also mean:

Extended unemployment benefits would end for 2 million people. Weekly unemployment checks average about $320 nationwide.

The stock market would probably drop, though maybe not by much. "There is starting to become a little bit of an acceptance that we fall off the fiscal cliff," said J.J. Kinahan, a strategist for TD Ameritrade.

The expiration of the Social Security tax cut and the end of emergency unemployment benefits would likely shave 0.7 percentage point off economic growth next year, the CBO estimates. The economy is now growing at about a 2 percent annual pace.

If no deal at all was reached by January and budget talks dragged on, many businesses might put off investment or hiring. That's why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.

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