The outlook is considerably darker than the forecast the agency released in January, when the CBO predicted that the fiscal cliff would trigger a mild recession in the first half of 2013, with negative economic growth of 1.3 percent. Now the agency foresees a stronger contraction of 2.9 percent in gross domestic product, “similar in magnitude to the recession of the early 1990s.”
The gloomier forecast is due in part to a decision by Congress to steepen the fiscal cliff by extending a temporary payroll tax break and emergency unemployment benefits, which are now also set to expire in January. In addition, CBO analysts have concluded that the underlying economy is weaker than previously predicted.
The agency still expects the economy to rebound quickly but now says growth would be weaker than previously forecast, with the economy expanding by an annualized rate of just 1.9 percent in the second half of 2013.
“The magnitude of the slowdown we’re discussing next year is significant,” CBO director Douglas Elmendorf said at a morning briefing. He noted that going over the cliff could cost the nation about 2 million jobs.
Elmendorf said the shock of the cliff would be felt for years to come, with the unemployment rate stuck above 8 percent through 2014. And the effects are likely to be felt well before the fiscal cliff hits, according to the budget outlook released Wednesday, as “businesses’ and consumers’ concern about the scheduled fiscal tightening will lead them to spend more cautiously than they otherwise would have” during the remainder of 2012.
The CBO’s latest fiscal outlook is likely to fuel the raging debate over budget policy as the nation barrels toward the Nov. 6 elections. Republicans, including presidential candidate Mitt Romney, want to postpone the biggest chunk of the cliff — $331 billion in tax hikes — to give Congress time to overhaul the tax code. Democrats, including President Obama, say they will not delay tax hikes set to hit the richest Americans, those earning over $250,000 a year.
Republicans quickly accused Democrats of inviting economic disaster.
“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 written statement. “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 turned the tables, responding in a statement that the 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.”
GOP lawmakers, the statement said, “have chosen to double down on the same failed policies that led to the economic crisis in the first place. 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.”
Unless the election helps to resolve the standoff, the same political gridlock that has prevented a deficit-reduction deal for much of the past two years would this time produce one of the biggest rounds of deficit reduction in modern history. Instead of exceeding $1 trillion for a fifth straight year, the 2013 deficit would instead plummet to $641 billion, the CBO predicts.
For the current fiscal year, which ends Sept. 30, the CBO predicts the deficit will be just over $1.1 trillion, down slightly from previous projections, thanks to better-than-expected tax collections and lower spending as the war in Iraq ends and the effects of the 2009 economic stimulus wane.
The national debt is nonetheless growing apace, with debt owed to outside investors set to hit 73 percent of the overall economy by the end of September. That’s the highest level in more than 60 years, and nearly double the level in 2007, before the onset of the Great Recession.