U.S. Will Enter Recession If 'Fiscal Cliff' Not Avoided

The nonpartisan Congressional Budget Office (CBO) on Wednesday warned the economy will enter a recession next year if the country goes over the so-called fiscal cliff.

In its most dire warning yet about the fiscal cliff, the CBO said the economy would contract by 0.5 percent in calendar year 2013 if the George W. Bush-era tax rates expire and automatic spending cuts are implemented.

  Unemployment also would rise from 8.2 percent in 2012 to 9.1 percent next year, the office estimates.

"The stakes of fiscal policy are very high right now," CBO Director Doug Elmendorf said. He urged Congress to act in September to avoid the fiscal cliff.

"The sooner that that uncertainty is resolved, the stronger the economy would be in the second half of this year," he said. "Economic growth right now is being held back by the anticipation of this fiscal tightening."

CBO does not make recommendations to Congress but last year laid out the economic and budget effects of a range of choices for Congress, Elmendorf said.

He added that under current law, there will be 2 million fewer jobs if the fiscal cliff is allowed to take place, and said most of the contraction is due to the tax increases.

The contraction would be very severe in the first half of 2013. CBO sees the economy contracting by 2.9 percent in the first half - deeper than the 1.3 percent negative growth it had seen previously from the fiscal cliff.

To put the figures in context, the economy was contracting at a quarterly rate of about 3.5 percent at the depth of the recession in the early 1990s. The CBO said a recession caused by the fiscal cliff would likely resemble that downturn more than the more recent recession caused by the financial crisis, when the economy contracted at an 8.9 percent rate in the final quarter of 2008.

The gloomy picture of rising debt and weak economic growth marks CBO's final major report before the November election. The report is a sharp contrast with the 1.1 percent in growth the CBO projected in January for 2013 and 0.5 percent growth it projected in May.

CBO says the fiscal cliff will be worse than it had previously projected and that the "underlying strength" of the economy is weaker.

It said the effects of the fiscal cliff are worse in part because Congress extended a payroll tax holiday in February that is also set to expire in January.

House Speaker John Boehner (R-Ohio) on Wednesday put the onus on Democrats to act on the fiscal cliff. He noted that the House has passed bills replacing the automatic cuts with tailored cuts to mandatory spending such as on food stamps, and extending the Bush-era tax rates.

"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," Boehner said.

Congressional gridlock means the risk of Congress doing nothing to prevent the tax hikes and spending cuts is real.

Democrats last month threatened to let the nation go over the fiscal cliff unless Republicans agree to a "balanced" deficit package that includes some tax increases. The GOP has so far doubled down on its insistence that a deficit solution include only cuts to non-defense social spending.

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