WASHINGTON — A new recession is likely if a stalemate over tax and spending cuts continues between Democrats and Republicans, according to dire projections by the nonpartisan Congressional Budget Office on one of this year's defining campaign issues.
In its annual summertime report, the budget office said Wednesday that letting decade-old tax cuts expire and sweeping spending cuts occur in January — which will happen without congressional action — "would lead to economic conditions in 2013 that will probably be considered a recession."
If that happened, the economy would contract by 0.5 percent, a gloomier projection than the budget office made earlier this year when it envisioned slight growth under that scenario. Unemployment would rise to around 9 percent by late next year if the standoff persists, the analysts said, with budget office Director Douglas Elmendorf telling reporters that failing to resolve it would cost 2 million jobs.
"I think the stakes of fiscal policy are very high right now," Elmendorf said at a briefing, adding, "We have very serious budget challenges and very serious economic challenges in this country."
The budget office's latest warning came amid an election year in which neither President Barack Obama nor congressional Republicans have shown any signs of giving ground in their protracted battle over taxes, spending and the budget.
Obama wants to renew expiring tax cuts for everyone except individuals earning over $200,000 and couples who bring in above $250,000. Republicans are demanding that all tax cuts be extended. The two sides also have made no progress over how to prevent budget-wide spending cuts from taking effect.
According to Wednesday's budget office report, letting the tax cuts continue and preventing the spending cuts from taking effect would leave a deficit next year of just over $1 trillion. If the reverse occurs, the shortfall would be $641 billion — in effect sucking roughly $400 billion out of a U.S. economy that is already struggling.