Five days to go: What really happens if we fall off the fiscal cliff?

Posted at 7:37 AM, Dec 27, 2012
and last updated 2012-12-27 07:37:00-05

From CNN Wire Reports

NEW YORK (CNNMoney) — Five days left: It’s looking more and more like Washington may not get a deal done in time to avert the fiscal cliff.

What happens to the economy if lawmakers don’t cut a deal and the tax hikes and spending cuts become law?

The worst-case scenario is if Congress stands by and lets the fiscal cliff stay in effect all next year. Economists expect the U.S. economy would then fall into a recession.

Specifically, the Congressional Budget Office forecasts a drop of 0.5% in real gross domestic product and a 9.1% unemployment rate by the end of next year.

The good news is that no one expects Congress to let all fiscal cliff measures have their way with the economy for an extended period.

But there could still be an economic hit if lawmakers push the country over the fiscal cliff temporarily and then pass a fallback bill — one that mostly just averts some of the tax increases.

For example, a bill passed in early January that does not address the scheduled automatic spending cuts or raise the country’s debt ceiling.

In that case, economic growth could be dragged down somewhat in the first half of next year, according to estimates by economists at Goldman Sachs.

And that would come on top of a drag on growth that Goldman Sachs already expects from three things it believes are likely to happen: the expiration of the payroll tax cut, the expiration of the Bush-era tax cuts on the highest-income households, and the start of the new Medicare surtax on high income earners.

Five days left.