WASHINGTON (Reuters) - A stalemate over how to tackle a series of fiscal deadlines at year’s end would likely push the United States economy into recession in the first half of next year, the Congressional Budget Office warned on Tuesday.
A wave of U.S. tax hikes and automatic spending cuts - dubbed the “fiscal cliff” - are set to take effect in January unless Congress and the White House agree on ways to delay or revise at least some of them.
The CBO, the official budget and economic analyst for lawmakers, said the U.S. economy would contract at an annual rate of 1.3 percent for the first half of 2013 if lawmakers take no action to prevent the looming tax hikes and spending cuts.
“Given the pattern of past recessions ... such a contraction in output in the first half of 2013 would probably be judged to be a recession,” the CBO said.
At the same time, CBO said growth would snap back in the second half of the year to 2.3 percent, though it did not offer an explanation.
Historically low tax rates enacted under former President George W. Bush in 2001 and 2003, and jobless benefits for the long-term unemployed are both set to expire on December 31, as is a temporary payroll tax cut.
In addition, $1.2 trillion in across-the-board reductions in spending on federal programs would begin to phase in as a result of Congress’ failure late last year to find a comprehensive deal to cut the budget deficit.
House of Representatives Speaker John Boehner rekindled the debate last week over how to handle the pending deadlines when he declared that Republicans would not consider a boost to federal borrowing authority without a greater increase in spending cuts.
While the CBO did not explicitly address the debt-limit issue, it is among the potential decisions lawmakers face at the end of the year.
The CBO said that although taking action to prevent some of the tax hikes and spending cuts could boost growth in the short term, having no long term plan for “fiscal restraint” is not sustainable.
The conventional wisdom has been that lawmakers will take no action on any of these major issues until after the November 6 elections.
Earlier on Tuesday, the Organization for Economic Cooperation and Development warned of a sharp fiscal contraction next year that could derail the U.S. economic recovery if lawmakers stalled. It also urged the government to move only gradually to tighten its budget.
“The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery,” the OECD said in its latest economic outlook.
Wall Street economists forecast that fiscal policy could tighten by about $600 billion next year, or about 4 percent of GDP, if lawmakers fail to reach an agreement. Goldman Sachs estimates the “fiscal cliff” could shave nearly 4 percentage points from GDP in the first half of 2013.
Most economists, however, expect lawmakers to find a way to soften the blow.
In its forecasts, the OECD said the U.S. economy should grow 2.4 percent this year and 2.6 percent in 2013. Those projections assume the budget deficit is cut by 1 percent and 1-1/2 percent of GDP, respectively, this year and next.
The United States has run budget deficits topping $1 trillion for three straight years, and it is on course to do so for a fourth.
Editing by Kenneth Barry