CBO warns that inaction could push U.S. off 'fiscal cliff'

WASHINGTON — A new government study released Tuesday says that allowing Bush-era tax cuts to expire and a round of automatic spending cuts scheduled to take effect would probably throw the economy into a recession.

The Congressional Budget Office report says that the economy would shrink 1.3 percent in the first half of next year if the government is allowed to fall off this so-called "fiscal cliff" on Jan. 1 — if higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies are kept in place.

There's common agreement that lawmakers will act either late this year or early next year to head off the dramatic shift in the government's financial situation. But if they were left in place, CBO says it would wring hundreds of billions of dollars from the budget deficit that would "represent an additional drag on the weak economic expansion."

"Such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO said.

The economy would rebound at a 2.3 percent growth rate in the second half of the year, however, under CBO projections.

At issue is the full expiration of two rounds of major tax cuts enacted during the Bush administration and automatic spending cuts on the Pentagon and domestic programs that are scheduled to take effect as punishment for the failure of last year's deficit "supercommittee" to produce a deficit-cutting agreement last year.

Last summer's debt and budget agreement imposed almost $1 trillion in cuts to agency budgets over the coming decade and required automatic cuts — dubbed a sequester in Washington-speak — of another $1 trillion or so over the coming decade.

The CBO study came as Capitol Hill is hopelessly gridlocked over spending and taxes in advance of the fall elections. The White House and top Democrats like Senate Majority Leader Harry Reid of Nevada say they will refuse to act on the expiring tax cuts and automatic spending cuts unless Republicans show greater flexibility on raising taxes.

Republicans are pressing to deal with the problem now. But they're not showing any more flexibility on tax increases.

"You can call this a fiscal cliff. You can call it Taxmageddon as others have done," said Sen. Orrin Hatch, R-Utah. "Whatever you call it, it will be a disaster for the middle class. And it will be a disaster for the small businesses that will be the engine of our economic recovery."

CBO warns that inaction could push U.S. off 'fiscal cliff' 05/22/12 [Last modified: Wednesday, May 23, 2012 12:04am]

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