NEW YORK (CNNMoney) -- Trillions of dollars in looming tax hikes and spending cuts set to take effect next year would likely cause a recession, the Congressional Budget Office said Tuesday.
At issue is the so-called fiscal cliff -- a series of measures set to begin in January that would take more than $500 billion out of the economy in 2013 alone.
Those measures include the expiration of the Bush tax cuts and protection of the middle class from the Alternative Minimum Tax, the onset of $1 trillion in blunt spending cuts, and a reduction in Medicare doctors' pay.
If Congress lets all those policies take effect, inflation-adjusted growth for 2013 would be just 0.5% -- with the economy projected to contract by 1.3% in the first half of the year and to grow by 2.3% in the second half.
"Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO said.
Overall, taxable income would be lower, unemployment would be higher, tax revenue would fall, and spending on safety net provisions such as jobless benefits would increase, the CBO said.
Federal budget deficits, meanwhile, would be reduced by more than $500 billion.
By contrast, were lawmakers to cancel the onset of the fiscal cliff measures, the CBO estimates that growth in real GDP for calendar year 2013 would come in around 4.4%.
For Congress, the outlines of the pending fiscal crisis are clear: Don’t do a thing, and watch the economy slip into a double-dip recession early next year. Or cancel the looming tax increases and spending cuts, watch the deficit rise, and push the government ever closer to a European-style debt crisis.
That decision was put in stark terms Tuesday by the Congressional Budget Office, which in a new analysis said the economy will plunge into a recession early next year if Congress lets taxes rise and spending be cut, as called for under the law.
But if Congress changes the law to keep taxes low and spending high, it could add more than half a trillion dollars to the deficit in 2013, marking a fifth straight year of trillion-dollar deficits and risking the patience of the country’s creditors.
The CBO numbers come just as the debate is heating up on Capitol Hill over how to handle the looming “fiscal cliff,” which Congress created by continually pushing off tough decisions on both taxes and spending.
Senate Majority Leader Harry Reid, Nevada Democrat, signaled Tuesday that he will allow the automatic spending cuts called for in last year’s debt deal to go into effect — culling billions of dollars from defense and domestic spending — unless Republicans agree to allow taxes to increase on at least some taxpayers.
“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit-reduction package that asks millionaires to pay their fair share,” Mr. Reid said.
Republicans remain adamant that the lower income- and investment-tax rates passed in 2001 and 2003 under President Bush, and extended in 2010 under President Obama, must be extended again.
“No economy can sustain such a hit without being hurled into recession,” said Sen Orrin G. Hatch, the ranking Republican on the Senate Finance Committee, which oversees tax policy.
frick Hatch. Guy's no better than Reid, except with Reid, I expect him to try to frick the country at every opportunity.
The only hope is for the dems to take back the house, and keep the senate.
It will be extremely challenging to solve our nation's problems, even with a united government. With the slop we have in government today, we don't have a chance. Remember, they want to default.
What do the Dems want?
To soak the rich and keep all the middle class tax cuts? More and more credits and giveaways in the tax code so that 30% of federal taxpayers pay income tax instead of the current 50% of taxpayers? Make the payroll tax permanent? Never reform entitlement spending?
DA, just are the Dems so much more fiscally responsible in your mind?
How have Obama and the Dems (Pelosi and Reid) shown themselves to be capable of balancing budgets and moving the government into a long term sustainable financial position?
Unless you want to reelect Bill Clinton and the GOP congress of the 90s, I'm not sure where this hope you have comes from. Seems very faith based and not founded in anything resembling reality.