CBO gives a starker warning of fiscal cliff

It offered a grimmer forecast of the costs of not reaching a deal to avert tax hikes and spending cuts.

Posted: August 24, 2012

WASHINGTON - The nation would be plunged into a significant recession during the first half of next year if Congress fails to avert nearly $500 billion in tax increases 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 - 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, when the CBO predicted that the fiscal cliff would trigger a mild recession in the first half of 2013 followed by a quick recovery.

Since that forecast was issued, Congress has steepened the cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are now also set to expire in January. In addition, CBO analysts have concluded that the underlying economy is weaker than had been predicted.

A long-lasting shock

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 1.9 percent in the second half of next year.

The shock would be felt for years, 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 Nov. 6 elections approach. Republicans, including presidential candidate Mitt Romney, want to postpone the biggest chunk of the cliff - $331 billion in tax increases - to give Congress time to overhaul the tax code. Democrats, including President Obama, say they will not delay tax increases set to hit the richest Americans, those earning more than $250,000 a year.

Trading charges

Republicans quickly accused Democrats of inviting economic disaster.

"This CBO report underscores why on August 1, I and other House GOP leaders urged the Senate to follow the House in passing legislation that would steer our nation clear of the fiscal cliff," House Speaker John A. Boehner (R., Ohio) said in a written statement.

The White House turned the tables, responding in a statement that the report "only reinforces the urgent need for House Republicans to follow the Senate's lead and pass a bill that gives middle-class families the confidence that they won't see their taxes go up at the beginning of next year."

Unless the election helps to end the standoff, the gridlock that halted a deficit deal for much of the last 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 fall to $641 billion, the CBO predicts.

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