Preparing for a trip to the fiscal cliff

A man walks near the U.S. Capitol building in Washington, D.C.

Jeremy Hobson: Lawmakers have left Washington for the August recess. And they did so without taking action on one of the biggest economic hurdles ahead. That would be the so-called fiscal cliff. In January the Bush tax cuts are set to expire and hundreds of billions of dollars in spending cuts are set to go into effect automatically. Businesses and investors are trying to prepare as best they can for whatever may come. But what should the rest of us be doing? Julia Coronado is chief economist with the investment bank BNP Paribas, and she's with us live as she is every Monday. Good morning.

Julia Coronado: Good morning.

Hobson: Well Julia, what do you expect is going to happen here? Do you think we’ll go careening off the fiscal cliff or will we serve at the last minute?

Coronado: Let’s be clear. The fiscal cliff is very very steep. It adds up to about 4 percent of GDP, so if we go off this cliff it will throw us into a recession. And for that reason, I think that there will be plenty of bluster ahead of the elections -- nothing gets done 'til after November, but come December the lawmakers on both sides of the aisle will hold hands, sing "Kumbaya" and probably pass a one-year extension of most of these measures. So we won’t, in fact, end up going off the fiscal cliff.

Hobson: So, what are the rest of us supposed to do then? I mean, if Washington is driving the bus here towards the cliff are we supposed to buckle up and put on a blindfold?

Coronado: Well, I would never advocate putting on a blindfold as an economist. I would say that what you should do is not panic and know that probably some of these measures will take effect at some point. In other words, we’re all going to probably pay higher taxes at some point in the future, if it’s not 2013 it may be later than that. But just sort of, plan as you usually do and go about life as usual and not make radical changes in anticipation of the fiscal cliff.

Hobson: All right, we will do. Julia Coronado, chief economist with the investment bank BNP Paribas, thanks as always.

Coronado: It’s a pleasure.

About the author

Julia Coronado is chief economist at BNP Paribas.

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