By Erik Wasson - 05/23/12 12:17 AM EDT
The nonpartisan Congressional Budget Office (CBO) 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 totaling roughly $109 billion triggered by last August’s debt-ceiling deal 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.
“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.
This is the first time CBO has forecast a recession resulting from the fiscal cliff. In January it saw 1.1 percent GDP growth in 2013 if policies are not dealt with.
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If Congress and the White House turn off all the automatic cuts and the tax increase, growth would rise to 4.4 percent, CBO predicted in the report.
The CBO projections appear to go further than other policymakers have gone in stating the economic risks of lawmakers failing to act.
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.
Unless future spending cuts are made, the national debt would grow at unsustainable rates and hurt long-term growth in that scenario, CBO warned.
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 could be limited to punting most issues into 2013 by extending current policies temporarily.
The White House said the CBO report shows that Congress should adopt President Obama’s overall budget plans.
“The president has put forth his plan to keep the recovery going now and reduce the deficit by more than $4 trillion over the next decade. Congress should act to avoid the scenario CBO lays out by putting forth balanced deficit reduction that meets the test of fairness and shared responsibility,” Office of Management and Budget spokesman Ken Baer said.
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.
In a Tuesday opinion piece in USA Today, Boehner blamed President Obama for the failure to lock in a long-term fiscal solution last year.
“The president lost his courage, and the country lost its gold-plated triple-A credit rating for the first time,” Boehner wrote. “Since then, the president has been in campaign mode — playing small ball at a time when we need to address big challenges.”
House Budget Committee ranking member Rep. Chris Van Hollen (D-Md.) said the CBO warning means the Democratic path should be followed.
“It is clear that we need to act and we must do so in a balanced way,” he said.
“Given this report, Speaker Boehner’s threat to prevent the United States from paying its bills unless Republicans are able to impose additional economy-slowing austerity measures is especially reckless and irresponsible,” Van Hollen said.
House Majority Leader Eric Cantor (R-Va.) speaking on Fox News Tuesday said Congress should give certainty to the economy by canceling the scheduled tax increases now, but if it does not the public will have a clear choice in November.
“We are going to try every way we can to make sure taxes don’t go up on anybody,” Cantor said. “And so that is why we are saying this election, really, is much about the fact that if people do not want their taxes going up, they have got to vote to make sure that they don’t. And that is a vote for Mitt Romney.”
Earlier this month the House passed a bill replacing $78 billion of the $109 billion in automatic across-the-board spending cuts with a package of cuts to social programs over 10 years. Boehner has said the House will pass an extension of all the Bush-era tax rates before the election.
Those GOP actions are unlikely to be taken up in the Senate.
The White House and Senate Democrats want to end the tax breaks for the wealthy but extend them for the middle class. Democrats want the automatic spending cuts to be replaced by cuts less focused on social programs and revenue from ending tax breaks, including for oil and gas companies.
Senate Majority Leader Harry Reid (D-Nev.) said the CBO report means that the GOP should extend the middle class tax rates and come to the table ready to compromise with Democrats.
“We could avoid the so-called fiscal cliff tomorrow if Republicans would agree to extend the middle class tax cuts, which would provide certainty to millions of families and give us ample time to deal with the other challenges facing Congress at the end of the year,” he said. “If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit reduction package that asks millionaires to pay their fair share.”
Also on Tuesday, Reid 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 to chart a new fiscal course.
“The American people want a balanced approach to fiscal policy that combines smart spending cuts with revenue measures that ask millionaires and big corporations to pay their fair share,” Reid wrote. “Yet a strict adherence to Tea Party ideology among Republicans in both the House and the Senate has so far put that balanced, common-sense solution out of reach.”
Deficit hawks have been hoping that lawmakers would put their differences aside and come up with a compromise along the lines of the Bowles-Simpson deficit commission, which sought to reform the tax code while trimming some entitlement benefits.
Reacting to the CBO report, the Center for a Responsible Federal Budget’s Maya MacGuineas said “you can only hope that as we march down a treacherous path between a fiscal cliff-recession and a mountain of debt, lawmakers are hard at work to come up with a workable solution, rather than taking the year off with the excuse that it is an election year.”
— Updated at 8:17 p.m.