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The Economic Edge

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CBO Warns Recession in 2013 Unless Congress Acts on Fiscal Issues

May 22nd 2012

People lined up for jobs

The non-partisan Congressional Budget Office said Tuesday that unless lawmakers act to prevent scheduled tax increases and spending cuts at the end of the year, a recession will likely result in early 2013. Early next year income taxes are set to go up when the Bush era tax rates expire. Automatic spending cuts triggered by last August’s debt ceiling deal to the tune of $109 billion are set to hit. Meanwhile, payments to physicians under Medicare will be slashed

CBO projects that these and other elements of the so-called “fiscal cliff” will cause the economy to contract as demand dries up. It projected in a Tuesday report that the gross domestic product (GDP) will contract by 1.3 percent in the first half of 2013 before growing 2.3 percent later in the year. Annualized, GDP would grow just 0.5 percent in 2013.

“Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession,” the report states. A recession is technically defined as two economic quarters of negative economic growth. If Congress and the White House turn off all the automatic cuts and tax increase, growth would rise to 4.4 percent, CBO predicted.  The CBO projections appear to go farther in stating the economic risks of lawmakers failing to act than other policymakers have gone.

Fed Chairman Ben Bernanke has warned of the risk to the economic recovery. "It's very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there's absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy," Bernanke told reporters in April. "I am concerned that if all the tax increases and spending cuts that are associated with current law would take place, absent congressional actions ... that'd be a significant risk to the recovery. "

Keeping the automatic cuts and tax increase in place would reduce the deficit by $607 billion in 2012 and 2013, CBO notes however. Unless future spending cuts are made, the national debt would grow at unsustainable rates and hurt long-term growth in that scenario, CBO said.

Democrats and Republicans are in a standoff over fiscal issues and are unlikely to tackle the “fiscal cliff” until after the November elections. Lame-duck action may be limited to punting most issues into 2013 by extending current policies temporarily. Last week, House Speaker John Boehner (R-Ohio) called on Congress and the White House to work out a long-term deficit deal and threatened not to raise the nation’s debt ceiling next year unless a greater amount of spending cuts is enacted.

On Tuesday, Senate Majority Leader Harry Reid (D-Nev.) wrote to Senate Republicans to say that action on debt issues appears to be “impossible” before the election so long as Republicans continue to reject any new tax revenue as part of a way chart a new fiscal course.

Erik Wasson writes for The Hill, from which this article is adapted.


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