The U.S. economy would experience a renewed recession coupled with rising unemployment rates if Congress does not act to avert a series of automatic tax hikes and spending cuts planned to go into effect in January, according to a report released by the bipartisan Congressional Budget Office (CBO) on Wednesday.
CBO estimated that the deficit would decrease slightly to just over $1 trillion, unemployment would drop to eight percent and GDP would expand by 1.7 percent if a tax extension/spending agreement was reached.
Conversely, although allowing tax hikes and spending cuts to go into effect would lower the deficit to $641 billion, employment would skyrocket to 9.1 percent and GDP would contract by 0.5 percent.
The report's findings are much gloomier than a similar assessment released in January, which said only a mild recession would be triggered by not reaching an agreement on the spending cuts/tax increases.
Overall, however, the report says that even if a Congressional agreement occurred, extending tax cuts and increasing spending would not be a long-term solution for fiscal growth.
Under the alternative fiscal scenario, "real GDP would be higher in the first few years of the projection period than in CBO's baseline economic forecast, and the unemployment rate would be lower," the CBO report said.
"However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits," the CBO added.
"In the later part of the projection period, the economy would grow more slowly than in CBO's baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective."
Both Republicans and Democrats jumped on the report, with both sides saying it represented a need for their economic policies to be accepted.
"This CBO report underscores why on August 1, I and other House GOP leaders urged the Senate to follow the House in passing legislation that would steer our nation clear of the fiscal cliff," House Speaker John A. Boehner, R-Ohio, said in a statement.
He added, "Instead of threatening to drive us off the fiscal cliff and tank our economy in their quest for higher taxes, I would urge President Obama and congressional Democrats to work with us to stop the coming tax hike that threatens our economy and replace the looming defense cuts with common sense reforms."
The White House, alternatively, used the opportunity to criticize Republican policies and called for an extension of tax cuts for the middle class.
"Today's Congressional Budget Office report only reinforces the urgent need for House Republicans to follow the Senate's lead and pass a bill that gives middle class families the confidence that they won't see their taxes go up at the beginning of next year," a statement from Press Secretary Jay Carney read.
"Congress also needs to act right now to prevent arbitrary spending cuts that would hurt military families, seniors on Medicare, and children who deserve a quality education."
"It's time to replace these cuts with balanced deficit reduction that asks the wealthiest Americans and largest corporations to go back to the tax rates they were paying under Bill Clinton - back when our economy created 23 million new jobs and a record surplus," the statement added.
For 2012, CBO estimated the federal budget deficit will total $1.1 trillion, a small decrease from March estimates of $1.2 trillion.
GDP growth will rise from 1 3/4 percent in the first half of 2012 to around 2 1/2 percent in the second half of the year, the report added. The unemployment rate will stay above 8 percent.
by RTT Staff Writer
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