Americans will likely face another recession and higher unemployment next year
if a divided Congress and the White House allow steep budget cuts to take
effect as tax cuts expire, according a Congressional Budget Office report
The nonpartisan agency warned as recently as May that failure to address the automatic cuts and tax increases might hurt the economy, but its latest report is more dire.
If the automatic cuts and tax hikes begin, "fiscal tightening will probably lead to a recession in 2013 and an unemployment rate that remains above 8 percent through 2014," the analysts wrote.
The shrinking economy would shed 2 million jobs, said Douglas Elmendorf, the budget office's director.
The Congressional Budget Office report stated that unemployment would spike in the second half of 2013, reaching 9 percent.
"It's kind of like one more nail in the coffin that says we gotta get this fixed," said U.S. Sen. Mark Warner, D-Va., who has long pushed for a broad deficit reduction plan that includes new revenues and budget cuts. "Any business leader or elected official who says they didn't see this coming is playing with fire."
The automatic changes -- dubbed a fiscal cliff in Washington -- will bring more money into the federal coffers with the Dec. 31 expiration of popular tax deductions for families and tax breaks in Social Security and income taxes. At the same time, about $1 trillion in budget cuts spread over ten years -- half from defense and half from social programs and other services -- will begin Jan. 2.
The combination of reduced spending and higher taxes would help lower the federal debt by $7 trillion. But Congressional Budget Office analysts have warned the changes would be too great of a shock to the economy. Most of expiring tax cuts and other expenditures were set in place by Congress and the White House in separate bills approved years ago to stimulate the economy or help the unemployed.
The automatic budget cuts -- which most in Congress supported last summer as a means of forcing compromise on a budget and debt reduction plan -- were never intended to occur. But when legislators failed to reach a deal, the cuts were triggered.
The budget office, considered by Republican and Democratic lawmakers to be a primary source for financial analysis, suggested Wednesday that avoiding another recession will depend Congress' ability to reach an agreement.
"Whether lawmakers allow scheduled policy changes to take effect or alter them will play a crucial role in determining the path of the federal budget over the next decade and the outlook for the economy," the Congressional Budget Office report says.
The expiring tax breaks include an end to temporary reductions first passed during President George W. Bush's administration. Income tax rates will rise next year for everyone, as will capital gains taxes. Many married couples filing jointly will pay more. The $1,000 annual tax credit given to parents for every qualified child under age 17 will be cut to $500.
The temporary 2 percent reduction in the Social Security tax also will expire.
Other changes that begin with the new year include significantly smaller Medicare payments for doctors and a shortening of unemployment benefits.
With Congress now in a monthlong recess and the House scheduled to be in session for only 13 days before the November elections, many legislators say Congress won't attempt to address the problem until near the end of the year.
The Congressional Budget Office noted that simply passing legislation to keep all the current taxes and spending in place might appear to be a short-term solution, but it would lead to serious credit problems for the government, which would have to continue borrowing heavily, expanding the national debt.
This year, for example, the government is expected to borrow $1.1 trillion to pay operating expenses. Continuing that strategy "would place the budget on a path that is ultimately unsustainable," the report states.
Tax and budget issues have been the focus of an intense ideological debate in Washington over the size of government, what services it should provide, how much revenue it should collect and who should pay.
After the report was issued, both sides agreed that the situation is economically perilous -- but each blamed the other for failing to compromise.
White House spokesman Jay Carney said the budget report showed it is time for the House to approve tax cuts for all but the nation's highest earners. The Democratic-led Senate approved such a bill last month, while the Republican-led House passed one extending tax reductions for all.
"They're willing to hold the middle class hostage unless we also give massive new tax cuts to millionaires and billionaires -- tax cuts we can't afford that would do nothing to strengthen the economy," Carney said in a statement.
Meanwhile, House Majority Leader Eric Cantor, R-Va., said Obama's budget plans "threaten our national security, jobs and economic growth."
He accused the Democrats of stalling.
U.S. Rep. Scott Rigell, R-2nd District, who has supported deep cuts in spending that would shrink the size of government and revamp entitlement programs, said the rancor of the debate is preventing any compromise.
"This is self-inflicted pain on so many levels," said Rigell, a first-term legislator who has urged Congress to stay in session to try to hammer out a deal. "The failure to find common ground is indeed threatening the future of our country."
The Associated Press contributed to this report.
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