Going off the fiscal cliff would mean 3 % less output from the US economy and unemployment would rise to 9.1 % by the end of 2013, according to a new report by the non-partisan Congressional Budget Office.

In an analysis that will set the terms for debate about the package of tax rises and spending cuts due at the end of the year, the CBO said that raising taxes on higher income individuals would lower output by just 0.1 per cent, but mean 200,000 fewer jobs at the end of next year.

The numbers show the high stakes for the failure to do a deal on the cliff and are set to become important weapons in the ideological battle over whether to raise taxes.

According to the CBO, while scrapping the tax cuts passed by former president George W. Bush for upper incomes has a modest effect on output, scrapping all of them would lower output by 1.4 per cent and jobs by 1.8m next year.

That is because those on higher incomes tend to save more of their income so there is less of an immediate effect on consumption. The figures show the effect on the economy next year but do not imply that the hit to jobs would be permanent.

Automatic spending cuts on defence and non-defence spending that are part of the cliff would each lower output by 0.4 per cent and jobs by 400,000. Letting temporary payroll tax cuts and unemployment benefits expire reduces end-of-2013 output by 0.7 per cent and jobs by 800,000.

"Output would be greater and unemployment lower in the next few years if some or all of the fiscal tightening scheduled under current law – sometimes called the fiscal cliff – was removed," said the CBO.

In a separate report, the CBO set out a series of options for reducing the deficit, arguing that very few policies "are large enough, by themselves, to accomplish a sizeable portion of the deficit reduction necessary".

For example, to lower cumulative deficits by $750bn over the rest of this decade entirely through cuts to discretionary spending would mean slashing budgets for areas such as defence, transport and education by 40 per cent.

To reduce the deficit entirely via tax increases would require a 20 per cent rise in government revenues.



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