The Congressional Budget Office (CBO) is raising concerns again that unless Congress takes measures now to bypass tax increases January 1, a recession is almost certain in 2013.
The Bush-era taxes will expire on January 1 and automatic spending cuts, which total around $109 billion and triggered by last August’s debt-ceiling deal are set to hit. If this collision isn’t addressed right away, the proverbial “fiscal cliff” will mean an even deeper recession that the one that began in 2009. But that’s not all, payments to physicians under Medicare will be slashed, thereby making it difficult if not impossible for millions to afford health care.
Growth and Loss
In a report released earlier this month, the agency outlines projections regarding the gross domestic product and its certainty of a 1.3% contract during the first six months of 2013, followed by a growth of 2.3% by mid-year. When one annualizes the numbers, it’s clear GDP would only grow than half a percent.
The report continues,
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.
Despite just having coming through one of the more difficult recessions the country’s ever seen, many folks can surely recognize it, even if they’re not entirely sure how to define it. In short, a recession is declared when at least two economic quarters of negative economic growth are pinpointed.
Making History
Interestingly, this is the first time in history the CBO has forecast a recession resulting from the fiscal cliff. Remember, earlier this year, it saw 1.1% growth in 2013 if policies were not effectively identified and remedied. It should also be noted the report highlights other scenarios.
If Congress and the White House turn off all the automatic cuts and the tax increase, growth could realistically increase to 4.4%. This in depth effort goes much further than what other lawmakers have offered in terms of what could happen if they continue with their bi-partisan antics. It’s an election year, after all.
This week, Fed Chairman Ben Bernanke proffered his own advice to add to what he told reporters earlier this year.
It’s very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there’s absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy. I am concerned that if all the tax increases and spending cuts that are associated with current law would take place, absent congressional actions… that’d be a significant risk to the recovery.
By leaving the automatic cuts and tax increase in place, the CBO reports it would reduce the deficit by $607 billion in 2012 and 2013. If future cuts aren’t made in spending habits, the worse possible scenario would be primed to play out. The national debt would grow at unsustainable rates and hurt long-term growth in that scenario, CBO warned.
Meanwhile, in an increasingly frustrating daily report that never seems to change, Democrats and Republicans are in a standoff over fiscal issues and will most likely refuse to address these issues until after the election in November. Both parties do have a couple of things in common: Each believes its party is right and each believes the other party is wrong.
Now, both parties are suggesting the CBO report supports their respective stances. The Obama Administration reiterated its plan for keeping the recovering on a more positive track has been in place. are unlikely to tackle the “fiscal cliff” until after the November elections. Lame-duck action could be limited to punting most issues into 2013 by extending current policies temporarily.
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