WASHINGTON – The U.S. would be plunged into a significant recession in the first half of next year if Congress fails to avert nearly $500 billion in tax hikes and spending cuts set to hit in January, congressional budget analysts said Wednesday.
The massive round of New Year’s belt-tightening — known as the “fiscal cliff” or Taxmageddon — would disrupt recent economic progress, push the unemployment rate back up to 9.1 percent by the end of 2013 and produce economic conditions “that will probably be considered a recession,” the nonpartisan Congressional Budget Office said.
The outlook is considerably darker than the forecast the agency released in January, which predicted the fiscal cliff would trigger a mild recession in the first half of 2013 followed by a quick recovery.
Since that forecast, Congress has steepened the cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are also set to expire in January. In addition, CBO analysts have concluded that the underlying economy is weaker than had been predicted.
The agency still expects the economy to recover quickly but now says growth would be weaker than previously forecast, with the economy expanding by an annualized rate of just 1.9 percent in the second half of next year.
The shock would be felt for years to come, with the unemployment rate stuck above 8 percent through 2014, the agency said. And the effects are likely to be felt well before the fiscal cliff hits, as “businesses’ and consumers’ concern about the scheduled fiscal tightening will lead them to spend more cautiously than they otherwise would have” during the remainder of 2012.
The CBO’s latest fiscal outlook is likely to fuel the raging debate over budget policy as the nation barrels toward the Nov. 6 elections.
Republicans, including presidential candidate Mitt Romney, want to postpone the biggest chunk of the cliff — $331 billion in tax hikes — to give Congress time to overhaul the tax code. Democrats, including President Obama, say they will not delay tax hikes set to hit the richest Americans, those earning over $250,000 a year.
Unless the election helps to resolve the standoff, the same political gridlock that has prevented a deficit-reduction deal for much of the past two years would this time produce one of the biggest rounds of deficit reduction in modern history.
Instead of exceeding $1 trillion for a fifth straight year, the 2013 deficit would instead plummet to $641 billion, the CBO predicts.
For the current fiscal year, which ends Sept. 30, the CBO predicts the deficit will be just over $1.1 trillion, down slightly from previous projections, thanks to better-than-expected tax collections and lower spending as the war in Iraq ends and the effects of the 2009 economic stimulus wane.
The national debt is nonetheless growing apace, with debt owed to outside investors set to hit 73 percent of the overall economy by the end of September. That’s the highest level in more than 60 years, and nearly double the level in 2007, before the onset of the Great Recession.