CBO Warns Fiscal Cliff Could Cause Another U.S. Recession

recessionThe Congressional Budget Office sent out a report that warned a fiscal cliff could lead the U.S. economy into another recession during 2013 and drive the unemployment rate up over nine percent.

It also said there would be a .5 percentage point drop in economic output should Congress fail to act in preventing tax increases and spending cuts that were in place by a former deficit agreement.  In the long run, however, the CBO said, the economy would return to lower unemployment and better growth rate.  It said by 2020 the unemployment rate will drop to 5.5 percent.

The CBO previously forecasted the economy could drop back into recession if nothing was done to stave off the fiscal cliff.

Should Congress attain a deal that circumvents the fiscal cliff, the federal budget deficit is expected to be $503 billion more during the 2013 fiscal year and $682 billion higher for the 2014 fiscal year.

During the 2013’s fourth quarter, the U.S. would see a .4 percent increase in its gross domestic product and 400,000 employment should lawmakers stave off a $55 billion in defense spending cuts demanded by next year by the previous debt deal. The CBO said an additional boost in employment and growth could happen if $55 billion in cuts to domestic spending is also avoided.

The CBO said prolonging the soon to be expired tax provisions and keeping the alternative minimum tax from striking more taxpayers would produce nearly two million jobs and increase the GDP. Making wealthy Americans pay more in taxes – while keeping other taxpayers safe from the higher taxes – would boost the GDP by 1.3 percent during the 2013’s fourth quarter and it would generate 1.6 million new jobs.

The CBO stated should people’s share of the expiring payroll tax cut and there is an expansion in the federal jobless benefits program, there will be a .7 percent increase in the economic output and about 800,000 new jobs.

Provided Congress does not act, tax rate increases on capital-gains, dividends and federal incomes will occur on Jan. 1, 2013. And, a higher rate will occur with the estate tax and will apply to smaller estates. In the meantime, a $110 billion in cut for domestic and defense programs will be a down payment for the $1 trillion in cuts demanded during the next decade according to the deficit deal last year.

Congress and the White House will begin to deliberate to come up with a budget compromise that keeps the fiscal cliff from happening.

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Posted by on Nov 15 2012. Filed under Featured, Finance, New. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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