CBO: Recession Coming if Fiscal Cliff is Hit

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Published August 22, 2012

| FOXBusiness

Updating an earlier report from May, the Congressional Budget Office predicts the economy will probably fall into a recession in 2013 if the "fiscal cliff" occurs on schedule at the end of this year, with GDP contracting by 0.5% in 2013 and unemployment rising back to 9%.

On Wednesday, the CBO said it estimates that if the Bush tax cuts expire on schedule, in combination with new required spending cuts under last year's debt ceiling deal, the deficit will shrink by about $500 billion in fiscal 2013, equal to about 3% of GDP.

The deficit itself would fall from about $1.1 trillion this year to about $640 billion in 2013 because of the higher tax revenues and lower spending.

The CBO said the fiscal cliff would cut projected job growth by more than a million jobs or so next year.

The new outlook is harsher than one released by the CBO in May. In that forecast, the agency projected a milder recession in the first half of the year if the fiscal cliff takes effect.

But in its updated outlook, CBO says the recession would be deeper -- nearly a 3% decline in GDP in the first half of 2013 -- before economic growth rebounds in the second half of 2013 and to a healthy 4.3% average annual rate in 2014-2017. It says it believes now that the "fiscal tightening" at year end would be "larger than previously estimated" in May.

One component is that payroll tax cuts will now expire at year end, adding to the impact of the falloff. Also, previous forecasts assumed Congress would act this summer on avoiding the cliff. It did not.

Finally, it sees economic growth slowing this year, which will also increase the impact of the fiscal cliff.

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http://www.foxbusiness.com/government/2012/08/22/cbo-fiscal-cliff-will-cause-2013-gdp-to-shrink/