Bloomberg News

Going Over U.S. ‘Fiscal Cliff’ May Mean Recession: CBO

May 22, 2012

Director of the Congressional Budget Office Douglas Elmendorf testifies during a hearing before the Senate Budget Committee February 2, 2012 on Capitol Hill in Washington, DC. Photographer: Alex Wong/Getty Images

Director of the Congressional Budget Office Douglas Elmendorf testifies during a hearing before the Senate Budget Committee February 2, 2012 on Capitol Hill in Washington, DC. Photographer: Alex Wong/Getty Images

The U.S. economy will probably tip back into recession next year if Congress doesn’t address an impending “fiscal cliff,” the Congressional Budget Office said.

The nonpartisan agency said in a report today that the economy would contract at an annual rate of 1.3 percent in the first half of 2013 if lawmakers allow the George W. Bush-era tax cuts to expire as scheduled and don’t head off $1.2 trillion in government spending cuts set to begin taking effect in January.

The economy would resume growing in the second half of next year, CBO said, at an annual rate of 2.3 percent.

“Such a contraction in output in the first half of 2013 would probably be judged to be a recession” according to past recessions as identified by the National Bureau of Economic Research, CBO said.

“Policy makers face difficult tradeoffs in deciding how quickly to implement policies to reduce budget deficits,” the report said. “Particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.”

Lawmakers in both parties have said they don’t plan to allow all of the tax increases or spending cuts to take effect as scheduled, though there is no agreement on how to address them. House Republicans are calling for cuts in food stamps and other programs for the poor to prevent cuts in Pentagon spending. Democrats reject that proposal.

November Election

Both sides are waiting until after the November election for serious negotiations. Even then, lawmakers probably will wait until next year to resolve the tax and spending issues, House Budget Committee Chairman Paul Ryan of Wisconsin and the panel’s top Democrat, Chris Van Hollen of Maryland, agreed last week at a budget conference in Washington.

“It is clear that we need to act and we must do so in a balanced way -- that is why Democrats support the extension of tax cuts only for the middle class,” Van Hollen said in a statement today. He called on Republicans to “put the needs of all American families before millionaires and big oil companies.”

Senator Orrin Hatch of Utah, the top Republican on the tax- writing Finance Committee, said Obama “seems content to pursue misguided micro-policies that target the so-called rich in the name of so-called fairness.”

‘Self-Anointed Arbiters’

In a Senate floor speech, Hatch said voters “don’t want politicians spreading the wealth around. They don’t want self- anointed arbiters of how much income is fair.”

The CBO said the economy would grow by around 4.4 percent and add 2 million jobs next year if lawmakers rescind all of the automatic spending cuts and extend the tax cuts.

That would add more than $500 billion to the U.S. budget deficit between 2012 and 2013, the agency said. Without some plan to address the debt, that would increase the risk of a crisis, CBO said.

“Growing debt also would increase the likelihood of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates,” the agency said.

The challenge for lawmakers is to reduce the long-term fiscal imbalance without hurting the economy through sudden changes, said Donald Marron, a former acting director of CBO.

“The optimal policy is to commit yourself to deficit reduction in the future while not doing very much of it next year,” Marron said. “It’s hard to distinguish that sincere policy from the ‘just kick the can down the road, I don’t really mean it’ policy.”

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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