WASHINGTON — A stalemate between Democrats and Republicans that ends up boosting taxes and slashing federal spending in January would likely thrust the nation into a 2013 recession and cost 2 million jobs by the end of that year, Congress' top nonpartisan budget analyst warned Wednesday.

The cautionary report by the Congressional Budget Office, drearier than a similar alarm it issued in May, immediately raised the political stakes in one of this election year's signature conflicts between the two parties.

Without an agreement between President Barack Obama and Congress by January, tax reductions on virtually all taxpayers are scheduled to expire and spending cuts will be imposed on hundreds of popular domestic and defense programs. That would plunge the nation off a so-called "fiscal cliff," which each side is eager to blame on the other.

Together, the scheduled tax increases and spending cuts would total nearly $500 billion next year, the report said – a huge amount of activity to suck out of a $16 trillion economy that is already struggling. That would be the largest annual reduction in the federal deficit compared to the size of the economy in more than four decades, said Douglas Elmendorf, the budget office's director.

Doing that "would probably lead to a recession early next year," Elmendorf told reporters.

That scenario would cause the economy to shrink by 0.5 percent in 2013 and push unemployment up to around 9 percent in the second half of next year, according to the report. Elmendorf said that would mean 2 million fewer jobs than if the tax cuts are renewed and the spending cuts averted.

The prospect of triggering a recession added a new level of risk and complexity to this year's high-profile political fights over sparking job creation and curbing mammoth federal deficits.

Obama wants to renew expiring tax cuts but let rates rise on amounts exceeding $200,000 annually for individuals and $250,000 for couples. Republicans insist that all tax reductions be continued. The two sides are also stuck over how to head off budget-wide spending cuts triggered by last year's failure to broker a bipartisan deal on reducing the federal debt.

The White House said the budget report showed it is time for the Republican-led House to approve tax cuts for all but the nation's highest earners. The Democratic-led Senate approved such a bill last month, while the House passed one extending tax reductions for all.

"They're willing to hold the middle class hostage unless we also give massive new tax cuts to millionaires and billionaires – tax cuts we can't afford that would do nothing to strengthen the economy," White House spokesman Jay Carney said of Republicans in a written statement.

GOP presidential challenger Mitt Romney's campaign pointed its finger at the White House.

"Today's CBO report is another indictment of President Obama's economic policies that have resulted in overspending, increasing debt, and a growing financial burden on the next generation," said Romney campaign spokesperson Amanda Henneberg.

In written statements, No. 2 House GOP leader Rep. Eric Cantor of Virginia, said Obama's budget plans "threaten our national security, jobs and economic growth." And Rep. Chris Van Hollen of Maryland, top Democrat on the House Budget Committee, said Republicans want to "protect special interests and tax breaks for the wealthiest in our country."

In May, the budget office said gridlock over taxes and spending could cause a recession, but the warning was milder. Analysts said then that letting the tax cuts expire and the spending cuts take effect would cause the economy to shrink early in 2013 but grow later in the year for overall annual growth of 0.5 percent.

Elmendorf said his office has since lowered its expectations for economic activity. He said the economy was already showing signs of being hurt by uncertainty over the looming tax increases and spending cuts.

"We think that the economy right now is being held back by anticipation of this fiscal tightening," he said.

The report underscored that lawmakers face no easy answers.

While extending the tax cuts and avoiding the spending slashes would keep the economy stronger over the next two years, continuing those policies for the long term would produce annual budget deficits averaging almost $1 trillion for the next decade. That would produce debt totaling nearly $10 trillion for that period – pushing the government's cumulative debt to 90 percent of the size of the economy by 2022, a proportion unseen since just after World War II and widely considered badly damaging by economists.

That, said Elmendorf, "would put us on a path of federal debt that would ultimately be unsustainable."

Yet while ending the tax cuts and letting the spending cuts occur would cause quick economic damage, it would also produce more deficit reduction. If the tax cuts expire and spending reductions take place in January, next year's budget shortfall would be $641 billion – down from just over $1 trillion if the opposite occurs, the report said.

The budget office projected a $1.1 trillion federal deficit for 2012, the fourth straight year the government's shortfall will exceed $1 trillion.

It also envisions an economy recovering at only a modest pace the rest of this year, growing at an annual rate of 2.25 percent.

In two other findings that relate to this year's partisan battles, the budget office estimated that federal revenues – including income and payroll taxes – will reach 15.7 percent the size of the economy this year – well below the 18 percent average of the past 40 years.

Federal spending will hit an estimated 22.9 percent of the economy's size – above the 21 percent average of the past four decades.

Republicans say the government taxes and spends too much, assertions with which many Democrats disagree.

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  • Paul Ryan: QE2 Risks Inflation

    Back in 2010, Republican Vice Presidential candidate Paul Ryan explained that the Federal Reserves plan to purchase $600 billion worth of securities -- known as QE2 -- was little more than "sugar-high economics" that <a href="http://www.bloomberg.com/news/2012-08-14/romney-ryan-see-fed-qe-as-inflation-risk-amid-low-prices.html" target="_hplink">risked rising inflation and weakening the dollar</a>. But instead the opposite took place. According to Bloomberg: <blockquote>"Since that prediction by Ryan, who has been chosen by presumptive Republican presidential nominee Mitt Romney to be his running mate, the dollar has risen against major currencies and inflation has stayed below the Fed's goal of 2 percent."</blockquote>

  • Christina Romer: Unemployment Will Remain Below 8%

    In early January of 2009, Christina Romer, economic adviser to then President-elect Barack Obama, made a prediction: massive government stimulus on the order that would eventually be passed by Congress would keep unemployment below 8 percent, reports <a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/01/10/AR2009011001999.html" target="_hplink"><em>The Washington Post</em></a>. Without it, unemployment could reach as high as 9 percent. In July 2012, unemployment edged up to <a href="www.bls.gov" target="_hplink">8.3 percent</a>. It has not gone below 8 percent since <a href="http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=country:US&fdim_y=seasonality:S&dl=en&hl=en&q=us+unemployment+rate#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&tstart=984805200000&tend=1337227200000&hl=en_US&dl=en&ind=false" target="_hplink">January 2009</a>.

  • Jim Cramer: Obamacare Will Topple The Stock Market

    On <a href="http://mediamatters.org/blog/2010/03/22/dow-finishes-up-following-health-care-vote-pagi/162074" target="_hplink">March 18, 2010</a>, Jim Kramer stated on Larry Kudlow's program that Obamacare would tank the stock market. The reform package was, in his words, "the single greatest impediment to the stock market going higher." On March 23 of that year, according to <a href="http://www.cbsnews.com/8301-503544_162-20000981-503544.html" target="_hplink">CBS News</a>, President Obama signed health care reform into law. Following Yahoo's tracking of the Dow Jones, the market on April 1 2010 was at 10,927. On August 17, over two years later, the Dow Jones Industrial Average was pegged at <a href="http://data.cnbc.com/quotes/.DJIA" target="_hplink">13,264</a>. Granted, the market could still take a nose dive. But odds are it won't be because of health care reform.

  • Michelle Bachmann: Obama Taking 'The Final Leap To Socialism'

    In a radio interview Minnesota Congresswoman Michelle Bachmann gave with Bill Bennet in March of 2009, the Minnesotan claimed that Obama's policies were representing the "final leap into socialism," <a href="http://thinkprogress.org/politics/2009/03/05/36590/buchmann-thwart-obama/" target="_hplink">Think Progress</a> reported. But alas, while Bachmann's sensational claim may have gotten her into the spotlight, the government has been engaged in selling its stake in the industries that it had to temporarily prop up. General Motors, an automaker that the U.S. government had to prop up with emergency capital, bought back all preferred shares held by the U.S. Treasury as of December 2010, reports <a href="http://dealbook.nytimes.com/2010/12/16/g-m-buys-back-2-1-billion-preferred-shares/" target="_hplink"><em>The New York Times</em></a>. Wall Street's largest banks that have frequently brought about wrath from liberals such as <a href="http://www.nytimes.com/2011/07/18/opinion/18krugman.html?_r=1&ref=paulkrugman" target="_hplink">Paul Krugman,</a> like Citi, Goldman Sachs and JP Morgan, are still privately run.

  • Glenn Beck: U.S. Will Go Through 'Great Depression Times 100' (Or Hyperinflation)

    In early 2010, then-Fox News commentator Glenn Beck said that the U.S. was likely in for a "Great Depression Times 100," reports <a href="http://mediamatters.org/mmtv/201001050049" target="_hplink">Media Matters</a>, going on to say that the country would experience a period of hyperinflation. Unemployment during the Great Depression peaked at around 25 percent, according to an article published by <a href="http://www.bls.gov/opub/cwc/cm20030124ar02p1.htm" target="_hplink">the Bureau of Labor Statistics</a>. But even at the worst moments of the Great Recession, unemployment only reached slightly above 10 percent. Presently, it is <a href="http://www.huffingtonpost.com/2012/08/03/unemployment-rate-jobs-report-bls_n_1736843.html" target="_hplink">at 8.3 percent</a>, according to the Bureau of Labor Statistics. With inflation estimated to remain stagnant at 1.5 percent through 2012, the nightmare warnings of hyperinflation expounded by Beck as well as by renowned "economist" <a href="http://www.cobdencentre.org/2010/10/peter-schiff-dollar-hyperinflation-is-coming-unless-policy-direction-is-rapidly-changed/" target="_hplink">Peter Schiff</a> appears to be just that. A nightmare.

  • Rick Santelli: 'Stagflation Is Almost A Certainty'

    In October of 2009, CNBC analyst and Tea Party founder Rick Santelli told said on the show Fast Money that he believed <a href="http://65.55.53.237/id/15840232?video=1287468464&play=1" target="_hplink">"stagflation is almost a certainty."</a> In other words Santelli was predicting that America would go through a period of high inflation and high unemployment. The only question he had was when. In November of that year, <a href="http://www.bls.gov/cpi/cpid0910.pdf" target="_hplink">the Bureau of Labor Statistics</a> revealed that between October 2008 and October 2009, prices rose by 1.7 percent not including food and gas. This made, at the time, Santelli's claim even bolder. Even though unemployment is still high -- almost three years later -- inflation has risen far below the Federal Reserves 2 percent annual target, <a href="http://www.bloomberg.com/news/2012-08-14/romney-ryan-see-fed-qe-as-inflation-risk-amid-low-prices.html" target="_hplink">Bloomberg reports.</a>

  • Rush Limbaugh: Obamacare Will Leave 250 Million People Uninsured

    Among the many predictions conservative radio host Rush Limbaugh has made over the years, the one he made on March 8, 2010 was not one of his best. On his daily radio show <em>The Rush Limbaugh Show</em>, Limbaugh announced to his listeners that healthcare reform, which would be signed into law later that month, would end up leaving 250 million Americans uninsured, <a href="http://mediamatters.org/mmtv/201003080025" target="_hplink">Media Matters</a> reported. As of June 2012, 49.9 million Americans do not have health insurance, <a href="http://www.cnn.com/2012/06/27/politics/btn-health-care/index.html" target="_hplink">CNN estimated</a>.

  • Mitt Romney: U.S. WIll Default If We Raise Debt Ceiling

    In the <a href="http://transcripts.cnn.com/TRANSCRIPTS/1106/13/se.02.html" target="_hplink">June 13, 2011 Republican Presidential Debate</a>, Mitt Romney, when asked about the consequences of not raising the debt limit answered the moderator's question with a question. "Well, what happens if we continue to spend time and time again, year and year again more money than we take in?" As Asher Smith pointed out on <a href="http://www.huffingtonpost.com/asher-smith/republican-debate-economy_b_876899.html" target="_hplink"><em>The Huffington Post</em></a>, this can only mean that the U.S. will eventually be unable to pay off its obligations and, as a result, default. Bit as of August 2012, close to one year after the debt ceiling was raised, the U.S. still hasn't defaulted.

  • Bill Gross: End Of QE2 Would Cause Bond Yields To Go 'Much Higher'

    In March of 2011, PIMCO Co-Founder Bill Gross predicted an imminent spike in treasury bond yields following the end of the Federal Reserve's Quantitative Easing program, <a href="http://finance.fortune.cnn.com/2011/03/02/gross-warns-qe2s-end-could-sink-markets/" target="_hplink"><em>Fortune's</em> Colin Barr reported</a>. Bond yields, Gross told reporters, were likely to go "higher maybe even much higher" at the end of June 2011 when QE2 ended. The 10-year treasury bond yield has since fallen. Since the 2011, 10-year bond rates have hovered between 2.5 and 1.5 percent, according to <a href="http://www.bloomberg.com/quote/USGG10YR:IND/chart" target="_hplink">Bloomberg</a>.

  • Joe Biden: US Out Of Recession In 18 Months (Feb. '09)

    In February of 2009, Vice President Joe Biden predicted that the federal stimulus package being implemented by Barack Obama's administration would "literally drop kick us out of this recession," <a href="http://thehill.com/blogs/on-the-money/801-economy/114661-gop-reminds-biden-of-missed-prediction-on-the-recovery" target="_hplink"><em>The Hill</em></a> reported. "This [stimulus] is about getting this out and spent in 18 months to create 3.5 million jobs." Technically, the recession ended during the third fiscal quarter of 2009, <a href="http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm" target="_hplink">according to the Bureau of Economic Analysis</a>. But with unemployment hovering around over 8 percent for the last three years, some economists are no longer talking about calling the current economic period a recovery. Brad DeLong, an economist with UC Berkley, told readers on his blog in 2011 that we're now in the midst of a <a href="http://delong.typepad.com/sdj/2011/06/the-little-depression.html" target="_hplink">"Little Depression" instead.</a>

  • Peter Schiff: Inflation At 20 Percent By 2009

    Economist Peter Schiff stated that the Federal Reserves monetary policies would lead to 20 percent inflation within one year. The statement, made in October 2008 on <a href="http://www.youtube.com/watch?v=jB9fuIvksLw" target="_hplink">Glenn Beck's former CNN program</a>, was proven wrong. During 2009, <a href="http://www.tradingeconomics.com/united-states/inflation-cpi" target="_hplink">the U.S. actually experience deflation.</a>

  • Ron Paul: Beware Of Runaway Inflation

    Congressman Ron Paul believed that runaway inflation was "just horrendous" in May 2011, he said during an appearance on <a href="http://www.ronpaul.com/2009-05-12/ron-paul-warns-against-runaway-inflation/" target="_hplink">Fox Business News</a>. <a href="http://www.tradingeconomics.com/united-states/inflation-cpi" target="_hplink">When Congressman Paul made that statement</a>, inflation was pegged at 3.2 percent and, after peaking at 3.9 percent that October, inflation has steadily fallen to 1.4 percent in July 2012.