“If the fiscal were to happen, it would be a major macroeconomic event,” Blanchard said. The fiscal cliff is when a host of tax cuts expire and automatic spending cuts kick in at the end of the year.
Blanchard said the IMF’s 2 percent U.S. economic growth forecast is based on fiscal consolidation of about 1.5 percent of gross domestic product next year, but the fiscal cliff would represent a 4 percent consolidation. “It would probably kill growth in the U.S. next year and probably kill growth in advanced economies,” Blanchard said.
He added, “I think that if the U.S. fell off the fiscal cliff, I’m quite sure we’d see negative growth in the U.S. next year.”
On Monday, the IMF cut its global growth forecast and cautioned that the outlook could worsen if Europe does not quell its debt crisis.
“It’s not the end of the world, but clearly that’s not a very strong recovery,” Blanchard said of the forecasts. “They’re based on assumptions which may or may not turn out to be right."
Right now, Blanchard said the estimates assume the European crisis will ease, the U.S. will avoid the fiscal cliff and emerging markets will “do the right thing” to support growth.