CBO warns of deep recession if Congress fails to avert 'fiscal cliff'
The nonpartisan Congressional Budget Office (CBO) on
Wednesday warned the economy will enter a recession next year if the country
goes over the so-called fiscal cliff.
In its most dire warning yet about the fiscal cliff, the
CBO said the economy would contract by 0.5 percent in calendar year 2013 if the
George W. Bush-era tax rates expire and automatic spending cuts are
implemented.
Unemployment also would rise from 8.2 percent in 2012 to
9.1 percent next year, the office estimates.
The contraction would be very severe in the first half of
2013. CBO sees the economy contracting by 2.9 percent in the first half —
deeper than the 1.3 percent negative growth it had seen previously from the
fiscal cliff.
To put the figures in context, the economy was
contracting at a quarterly rate of about 3.5 percent at the depth of the
recession in the early 1990s. The CBO said a recession caused by the fiscal
cliff would likely resemble that downturn more than the more recent recession
caused by the financial crisis, when the economy contracted at an 8.9 percent
rate in the final quarter of 2008.
The gloomy picture of rising debt and weak economic
growth marks CBO’s final major report before the November election. The report
is a sharp contrast with the 1.1 percent in growth the CBO projected in January
for 2013 and 0.5 percent growth it projected in May.
CBO says the fiscal cliff will be worse than it had
previously projected and that the “underlying strength” of the economy is
weaker.
It said the effects of the fiscal cliff are worse in part
because Congress extended a payroll tax holiday in February that is also set to
expire in January.
Congressional gridlock means the risk of Congress doing
nothing to prevent the tax hikes and spending cuts is real.
Democrats last month threatened to let the nation go over
the fiscal cliff unless Republicans agree to a “balanced” deficit package that
includes some tax increases. The GOP has so far doubled down on its insistence
that a deficit solution include only cuts to non-defense social spending.
CBO projects a deficit of $1.1 trillion this year, the
fourth year of budget shortfalls over $1 trillion. This is a slight decrease
from the $1.2 trillion that CBO projected in March.
The report notes that debt held by the public will reach
73 percent of the economy this year, “the highest level since 1950 and about
twice the 36 percent of GDP that it measured at the end of 2007.”
The CBO report puts the focus back on President Obama’s
economic policies and the fiscal issues that the Republican presidential ticket
of Mitt Romney and House Budget Committee Chairman Paul Ryan (R-Wis.) considers
its strength.
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