Congressional Budget Office Warns of U.S. Recession After 'Fiscal Cliff'

May 22, 2012
Downturn likely in 2012 unless Congress stops scheduled spending cuts and tax hikes, the result of a fight between Democrat and Republican lawmakers over raising the country's debt limit.

The United States faces a likely recession next year if Congress fails to stop scheduled spending cuts and tax hikes in January, congressional budget analysts warned Tuesday.

The nonpartisan Congressional Budget Office said that if currently mandated fiscal conditions are implemented -- what some observers call a "fiscal cliff" -- the economy would contract at an annual rate of 1.3% in the first half of 2013.

That downturn "would probably be judged to be a recession," the agency said in a report.

The CBO predicted the economy would rebound in the second half of the year, to an annual pace of 2.3%, leaving full-year gross domestic product growth of just 0.5%.

That was substantially weaker than the CBO's January forecast for a 1.1% GDP expansion in 2013.

The worry is that last year's political "deal" over the country's deep fiscal problems will force immediate cuts of $1.2 billion from government spending at the same time that billions of dollars' worth of tax cuts expire, requiring consumers to cut back as well.

The "fiscal cliff" was the legal result of a fight between Democrat and Republican lawmakers over raising the country's debt limit last August, a fight that had pushed the country toward defaulting on its debt.

It fell into place when both parties could not agree on a broader deal to adjust the country's fiscal hole over the longer term.

Most analysts expect a new deal will be reached to avoid the cliff, but with the presidential and congressional election battle under way and elections only taking place in November, just weeks before the fiscal deadline, worries are that a deal might not get done.

The CBO estimated that if lawmakers changed fiscal policy in late 2012 to remove or offset all of the scheduled policies, GDP growth next year would be around 4.4%.

In April Fed Chairman Ben Bernanke warned Congress that the central bank would not be able to act as a savior for the economy if Congress failed to act.

"The size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy," he said.

For more on the fiscal cliff and its impact on manufacturing, click here.

Copyright Agence France-Presse, 2012

See Also:

Fed Sees Sharp U.S. Budget Cuts as 'Sizable Risk'

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