The U.S. economy would likely slide into a “significant recession” next
year if Congress doesn’t avert tax increases and spending cuts set to
begin in January, the Congressional Budget Office said Wednesday.
But if they are postponed for at least a year, the federal government would likely endure its fifth straight year with a budget deficit greater than $1 trillion, the CBO said.
These dueling pressures came into sharp focus as the nonpartisan agency released its final budget and economic forecast ahead of the November elections. “I think the stakes for fiscal policy are very high right now,” CBO director Douglas Elmendorf told reporters.
The fight over how to address tax and spending has put Washington in political paralysis. Democrats and Republicans aren’t expected to begin negotiating a deal until after the November elections, though some in both parties have warned that could be difficult given how little time they will have to maneuver.
The CBO painted two starkly different scenarios for next year, depending on what path lawmakers decide to take.
Under current law, the Bush-era tax cuts are scheduled to expire at the end of this year, raising tax rates on more than 100 million Americans. These tax increases, combined with roughly $100 billion in planned spending cuts on military and other government programs, would reduce projected deficits from $1.13 trillion
A laborer works at a rare-earth minerals mine in Jiangxi province in China.
in the fiscal year ending Sept. 30 to $641 billion for the year that ends Sept. 30, 2013.
That would cut the deficit from roughly 7.3% of the nation’s gross domestic product to roughly 4.0% of GDP, the CBO said, the largest oneyear reduction since 1969. But as a consequence, this would cause the economy to contract at an annualized rate of 2.9% in the first half of 2013, and by 0.5% over the entire year. The unemployment rate would rise to 9.1% at the end of the year from just above 8% now, CBO said.
If Congress were to postpone the tax increases and spending cuts, the deficit would fall just slightly in the next fiscal year, to $1.037 trillion, or 6.5% of GDP. The unemployment rate at the end of 2013 would be 8%, a difference of roughly two million jobs from the other scenario, CBO said. And the economy would grow by 1.7% over the year.
Democrats have advocated a combination of tax increases on upper-income Americans and spending cuts in a number of programs to reduce the deficit. The White House has called for extending all of the Bush-era tax cuts except on the portion of income earned that tops $250,000 for families. The CBO estimated this change would boost tax collections $42 billion in 2013 and $824 billion over the next 10 years.
Many Republicans have called for extending all the Bush-era tax cuts for at least another year and cutting spending on many programs. Likely GOP nominee Mitt Romney has called for a one-year extension of all the tax cuts and called on Congress to postpone spending cuts to next year, giving him time to develop his own deficit-reduction plan if elected.
But if they are postponed for at least a year, the federal government would likely endure its fifth straight year with a budget deficit greater than $1 trillion, the CBO said.
These dueling pressures came into sharp focus as the nonpartisan agency released its final budget and economic forecast ahead of the November elections. “I think the stakes for fiscal policy are very high right now,” CBO director Douglas Elmendorf told reporters.
The fight over how to address tax and spending has put Washington in political paralysis. Democrats and Republicans aren’t expected to begin negotiating a deal until after the November elections, though some in both parties have warned that could be difficult given how little time they will have to maneuver.
The CBO painted two starkly different scenarios for next year, depending on what path lawmakers decide to take.
Under current law, the Bush-era tax cuts are scheduled to expire at the end of this year, raising tax rates on more than 100 million Americans. These tax increases, combined with roughly $100 billion in planned spending cuts on military and other government programs, would reduce projected deficits from $1.13 trillion
A laborer works at a rare-earth minerals mine in Jiangxi province in China.
in the fiscal year ending Sept. 30 to $641 billion for the year that ends Sept. 30, 2013.
That would cut the deficit from roughly 7.3% of the nation’s gross domestic product to roughly 4.0% of GDP, the CBO said, the largest oneyear reduction since 1969. But as a consequence, this would cause the economy to contract at an annualized rate of 2.9% in the first half of 2013, and by 0.5% over the entire year. The unemployment rate would rise to 9.1% at the end of the year from just above 8% now, CBO said.
If Congress were to postpone the tax increases and spending cuts, the deficit would fall just slightly in the next fiscal year, to $1.037 trillion, or 6.5% of GDP. The unemployment rate at the end of 2013 would be 8%, a difference of roughly two million jobs from the other scenario, CBO said. And the economy would grow by 1.7% over the year.
Democrats have advocated a combination of tax increases on upper-income Americans and spending cuts in a number of programs to reduce the deficit. The White House has called for extending all of the Bush-era tax cuts except on the portion of income earned that tops $250,000 for families. The CBO estimated this change would boost tax collections $42 billion in 2013 and $824 billion over the next 10 years.
Many Republicans have called for extending all the Bush-era tax cuts for at least another year and cutting spending on many programs. Likely GOP nominee Mitt Romney has called for a one-year extension of all the tax cuts and called on Congress to postpone spending cuts to next year, giving him time to develop his own deficit-reduction plan if elected.
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