The Congressional Budget Office warned that the U.S. economy faced another recession if Congress failed to act to stop impending spending cuts and tax increases.
While spending cuts and tax increases would reduce the budget deficit, the changes would “lead to economic conditions in 2013 that will probably be considered a recession,” according to a new CBO report.
If the current plans are not changed, the CBO warned that growth could stall out, and that unemployment could increase to 9.1 percent.
The spending cuts were demanded by Republicans as part of the 2011 agreement to increase the debt ceiling. The cuts, which are split between defense and Medicare compensation, would pull $110 billion out of the sputtering economy. The cuts were designed to force bipartisan agreement on debt reduction, but Republicans refused to agree to any tax increases as part of a deficit reduction plan. Republicans have attempted to shift the defense cuts into other spending programs, but Democrats have refused to agree to further social spending cuts.
Additionally, taxes are scheduled to increase by as much as $500 billion in 2013, as the Bush tax cuts expire at the end of the year. Democrats and Republicans agree that the cuts should be extended for people earning less than $250,000 per year, but Republicans have insisted that cuts should be extended across the board, while Democrats favor ending the cuts for the wealthiest Americans.
The CBO’s warning sparked a round of recrimination in Washington. “Instead of threatening to drive us off the fiscal cliff and tank our economy in their quest for higher taxes, I would urge President Obama and congressional Democrats to work with us to stop the coming tax hike that threatens our economy and replace the looming defense cuts with common sense reforms,” said House Speaker John Boehner, R-Ohio.
In a response, the White House issued a statement saying the CBO’s projections show the “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.”
While most analysts expect the “fiscal cliff” will be avoided, most believe that Congress will not act before November’s elections.
Image Credit: Ramberg Media Images
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