The nonpartisan Congressional Budget Office (CBO) said Tuesday that unless lawmakers act to prevent scheduled tax increases and spending cuts at the end of the year, a recession will likely result in early 2013.
Early next year income taxes are set to go up when the Bush-era tax rates expire. Automatic spending cuts totaling roughly $109 billion triggered by last August’s debt-ceiling deal are set to hit. Meanwhile, payments to physicians under Medicare will be slashed.
CBO projects that these and other elements of the so-called “fiscal cliff” will cause the economy to contract as demand dries up.
It projected in a Tuesday report that the gross domestic product (GDP) will contract by 1.3 percent in the first half of 2013 before growing 2.3 percent later in the year. Annualized, GDP would grow just 0.5 percent in 2013.
“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 report states.
A recession is technically defined as two economic quarters of negative economic growth.
This is the first time CBO has forecast a recession resulting from the fiscal cliff. In January it saw 1.1 percent GDP growth in 2013 if policies are not dealt with.