'Fiscal Cliff' Could Cause Recession In 2013 Without Government Action, CBO Says

* Fiscal restraint in 2013 could lead to contraction-CBO

* No restraint over long run not sustainable-CBO

By Lucia Mutikani and Kim Dixon

WASHINGTON, May 22 (Reuters) - A stalemate over how to tackle a series of fiscal deadlines at year's end would likely push the United States economy into recession in the first half of next year, the Congressional Budget Office warned on Tuesday.

A wave of U.S. tax hikes and automatic spending cuts - dubbed the "fiscal cliff" - are set to take effect in January unless Congress and the White House agree on ways to delay or revise at least some of them.

The CBO, the official budget and economic analyst for lawmakers, said the U.S. economy would contract at an annual rate of 1.3 percent for the first half of 2013 if lawmakers take no action to prevent the looming tax hikes and spending cuts.

"Given the pattern of past recessions ... such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO said.

At the same time, CBO said growth would snap back in the second half of the year to 2.3 percent, though it did not offer an explanation.

Historically low tax rates enacted under former President George W. Bush in 2001 and 2003, and jobless benefits for the long-term unemployed are both set to expire on Dec. 31, as is a temporary payroll tax cut.

In addition, $1.2 trillion in across-the-board reductions in spending on federal programs would begin to phase in as a result of Congress' failure late last year to find a comprehensive deal to cut the budget deficit.

House of Representatives Speaker John Boehner rekindled the debate last week over how to handle the pending deadlines when he declared that Republicans would not consider a boost to federal borrowing authority without a greater increase in spending cuts.

While the CBO did not explicitly address the debt-limit issue, it is among the potential decisions lawmakers face at the end of the year.

The CBO said that although taking action to prevent some of the tax hikes and spending cuts could boost growth in the short term, having no long term plan for "fiscal restraint" is not sustainable.

The conventional wisdom has been that lawmakers will take no action on any of these major issues until after the Nov. 6 elections.

Earlier on Tuesday, the Organization for Economic Cooperation and Development warned of a sharp fiscal contraction next year that could derail the U.S. economic recovery if lawmakers stalled. It also urged the government to move only gradually to tighten its budget.

"The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery," the OECD said in its latest economic outlook.

Wall Street economists forecast that fiscal policy could tighten by about $600 billion next year, or about 4 percent of GDP, if lawmakers fail to reach an agreement. Goldman Sachs estimates the "fiscal cliff" could shave nearly 4 percentage points from GDP in the first half of 2013.

Most economists, however, expect lawmakers to find a way to soften the blow.

In its forecasts, the OECD said the U.S. economy should grow 2.4 percent this year and 2.6 percent in 2013. Those projections assume the budget deficit is cut by 1 percent and 1-1/2 percent of GDP, respectively, this year and next.

The United States has run budget deficits topping $1 trillion for three straight years, and it is on course to do so for a fourth.

Comments

[Lobachevsky]

01:17 PM on 06/12/2012

[jerrod24]

04:06 PM on 05/30/2012

When the fighting starts, even Martial law won't be enough.

[VPerry24]

06:49 PM on 05/24/2012

Just remember what the GOP said, they will do anything to ruin Obama so he won't get elected and some of you still don't see or believe it.

[JoeBlough]

06:39 PM on 05/24/2012

It's time to pay the piper. Let it happen.

[Grichde]

06:09 PM on 05/24/2012

Go figure. Another recession under Obama.

[joeisright]

05:00 PM on 05/24/2012

The left will cave again.

[oilfield]

06:08 PM on 05/24/2012

we hope.

[WthyrBendragon]

04:20 PM on 05/24/2012

Dipsticks like John Bo(eh)ner completely fail to realize that the fix for much of this economic mess can be made without touching tax rates or entitlements. Our tax code is rife with loopholes, deductions, and other means by which Congress has spent through it. Closing a tax loophole is actually a spending cut... not a tax increase. The fact that this all happens before the filing documents are complete is irrelevant.

[jerrod24]

04:09 PM on 05/30/2012

With Agent Orange leading the charge, the republicans will never be taken seriously, but I don't think they'll EVER recover from their current state of insanity. Boehner or no Boehner.

[StopMakingSense2]

02:14 PM on 05/24/2012

The conservative dream realized! They should be over joyed that their ideas are being taken to the extreme! A destroyed America! That becareful what you wish for thing again! Some never learn!

[bigblue22143]

12:05 PM on 05/24/2012

This is the key sentence in the whole article "The United States has run budget deficits topping $1 trillion for three straight years, and it is on course to do so for a fourth." Keeping that in mind in 2008 under Bush TARP was enacted.. Bush had a deficit of 464 billion and then after TARP his final deficit was the 1.4 trillion. TARP was suppose to be a one time infusion. So can anyone tell me what Baraack is now doing with that extra 784 billion dollars every year? It was a one time event but the socialist in office is still spending that much money. Anyone who says the wars, that answer is wrong. The wars were paid for through appropriations. Don't listen to what they say, just watch what they do. It's always a contradiction and against you. Why hasn't this administration passed a budget since Obama has been in office? The first 2 years he had total control and didn't even try to pass one. He was too busy bribing health care through congress with his shady deals like the "corn husker kickback". This administration is the ultimate in corruption and manipulation. Transparency is a joke.

[thejazz]

12:30 PM on 05/24/2012

Actual spending has remained almost flat for the past 4 years. The "extra" 784 billion comes from reduced revenue.

[WthyrBendragon]

04:24 PM on 05/24/2012

And the reduced revenue is due to the fact that the GOP dearly loves the creation of tax loopholes which they call business incentives. No matter what you call it it's an expenditure. The tax rate is what the tax rate is. Anything that applies a discount from that is an expense. Eliminate the loopholes and simplify the tax code and we'll end up with budget surpluses again.

[oilfield]

06:11 PM on 05/24/2012

the revenue is flat...spending is up.

[oilfield]

06:10 PM on 05/24/2012

mysteries of government....i thought a lot of tarp was paid back....except for the missing money of course.

[PROGRESSISGOOD]

11:56 AM on 05/24/2012

All we need to do is go after the money that is not currently circulating in the U.S. That would be the excess cash sitting in the off-shore bank accounts of the 1%; and, cuts to the military budget for money being spent to man our overseas bases.

No negative impact on the amount of cash in our economy and we get deficit reduction.

[Nikki cox]

10:01 AM on 05/24/2012

It’s very sad that people keep voting against their own best interests.

[Worst Pres Ever]

10:18 AM on 05/24/2012

Not to worry, Obama and the Dems will be out soon.

[ronp121]

10:42 AM on 05/24/2012

Then the real down slide will begin. Be ready be happy for you will have asked for it. I'm not much when it comes to sadism but. Believing in Romney will certainly show you the way. Glad my working days are over no way would I want to be job hunting for what is in store for the job seekers once the republicans are back in complete control. Obama 2012

[Nikki cox]

02:33 PM on 05/24/2012

Romney doesn't stand a chance. His own party doesn't even like him.

[Melinda Brunner]

09:26 AM on 05/24/2012

http://www.huffingtonpost.com/bob-cesca/the-truth-about-the-presi_1_b_1540698.html

Good article! the truth about the deficit.

[Lindytindy]

09:24 AM on 05/24/2012

Idiocy and ineptitude seasoned by corruption is the cause of the 'cliff dive'. Frat boys running the show inculcated with a lot of fascist ideology in Harvard and Yale, a sold out arm of multinational corporations.

[stuart100s]

09:24 AM on 05/24/2012

Obama's recession is about to become Obama's great depression. Save every penny that you can, it is going to be a rough ride. Maybe you can get a job in 4 years. Maybe we will have learned our lesson about capitalism vs socialism by then.

[TFlint]

09:40 AM on 05/24/2012

There is something called the Republican controlled House of Represenatives that controls Federal spending and it is unfair to call it Obama.

[stuart100s]

09:52 AM on 05/24/2012

Obama controls 2 of the 3 branches of gov't. This is not a Rep House problem. They are sending budgets to the Dem Senate where they are not even debated. But you knew that, didn't you? You just wanted to see if you could trick (lie) people into thinking the Reps had something to do with this fiasco, that will be called the great Obama recession.

[mfitz11]

09:44 AM on 05/24/2012

Obama's recession?
This economic mess has been more than 30 years in the making.
Statistically speaking the early 1980s (when Reagonomics took hold) was when the initial decline began.
This is the very point where incomes began to decrease in relation to inflation. Between 1980 and 1996 healthcare costs more than doubled and education costs increased by 65%.
Since that time we have been heading on a downward path and everyone from Reagen to H.W. Bush to Clinton, to W. Bush to Obama is to blame.
We'd be utterly and completely naive to think that this economic mess would have been solved by Obama in 3 years.
Most economists predict that if MASSIVE changes to our entire financial structure were made today, it would still be 8-15 years before we'd start to see any real tangible results.
I think people are incredibly naive about just how long we have been on the decline and how big of a mess we're in.
Unfortunately, even if major changes are made, it will still be about a decade before anything really started greatly improving.

[stuart100s]

10:05 AM on 05/24/2012

This is Obama's recession. He told us he could fix it, and that if he couldn't he should be a one term president. Youtube it if you don't believe me. I intend to hold him to his word. The naive people are the ones that voted for hope instead of a president. The naive people are the ones that voted for change, when they didn't know that change meant lossing their job and their home. Adding 5 trillion to the debt is just icing on the cake. You got what you deserved by hiring an amature.

[reviewingthesituation]

09:21 AM on 05/24/2012

If there's one thing I've learned in the past few years, it's that economists (of whatever political persuasion) don't know diddly. It's a brave new unpredictable world, whether we like it or not. I'm predicting that the American economy is about to see a resurgence because the growing pains of both the EU and China are going to bring investors back to the U.S in hordes. And when it becomes more apparent, in the next few months, that men like Romney have increased their wealth and sheltered it overseas at the expense of the American worker, it will become less acceptable to accuse others of being "Communists" while investing in and raking up more money in Communist China than in the U.S.

We can't (and shouldn't) become isolationist, but I'd love to see government policy directed more at creating a level playing field than in just assuring CEOs bigger salaries.

[Lindytindy]

09:29 AM on 05/24/2012

True, most economists are bought and sold by multinational corporations who fund their existence, give them media access, etc. Some do know what they are talking about like the one on Bloomberg news yesterday who said the European and coming American crises are the result of massive delusion at the top, refusal to see reality and amazingly stupid decision making as a result. I agree that we could benefit from European and Chinese, but we won't you see because of our free market global orientation which will ensure we are dragged down with them to our doom. When I say 'we' I mean 99% of us, the 1% will last a bit longer but will manage to ruin themselves as well. Nations will increasingly go isolationist, which is exactly what we should do. But won't because too many people have been brainwashed with free market voodoo economic ideology.