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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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