The U.S. will inevitably fall off the fiscal cliff on March 1, forcing $1.2 trillion in federal cuts and potentially lowering 2013 GDP by up to 0.75%, said former MFS Investment Management Chairman Robert Pozen.
Pozen, speaking at an Investment Management Consultants Association (IMCA) conference in New York City today, told an audience of advisors that Democrats and Republicans are too politically dug in to repeat the budget compromise that avoided a plunge off the cliff in January.
"On March 1, we are going to fall of the cliff," said Pozen, a senior lecturer at Harvard Business School and a fellow of the Brookings Institution. "That's what happens when Congress does nothing, and doing nothing is the sure bet here."
Failure to reach a compromise would mean $1.2 trillion in federal cuts would kick in over the next 10 years, half of that amount coming from defense, and the other half from expenditures excluding entitlements.
Pozen noted that when those automatic cuts were negotiated by both parties as part of the debt ceiling negotiations in 2011, they were thought of as unthinkable—providing enough motivation for the parties to reach a long-term compromise.
Since then, however, the parties remain far apart, with Republicans left with little leverage now that President Obama has won a second term. Now, Pozen says, the GOP views sequestration as "their only chance to achieve a significant spending cut."
He predicted that March and April would be "messy" months, and that the cuts will lower gross national product this year by 0.5% to 0.75%. But the draconian cuts may compel both parties to enter into budget negotations that may eventually lead to meaningful budget reform, Pozen said.
"In the end, maybe it won't be so bad," he said.
The budget impasse comes down to politics and math, Pozen said. On a political level, he said, the parties remain firm on their respective stances: Republicans, after giving ground in the January compromise, refuse to budge any further on new revenues, while Democrats insist on more revenue generation as part of future negotiations.
Pozen outlined to IMCA attendees how Congress and President Obama need to cut the deficit by $3 trillion over the next 10 years just to maintain the nation's current debt-to-GDP ratio. By his estimates, however, current proposals that may be acceptable to both parties will amount to no more than $1 trillion in deficit reduction—and he called that a "best case scenario."