MercoPress. South Atlantic News Agency

US Congress budget office warns “fiscal cliff” is already holding back the economy

CBO director Elmendorf anticipates recession in 2013 if no agreement is reached

The US Congress budget office launched on Wednesday a stern warning: massive spending cuts and tax hikes due next year will cause even worse economic damage than previously thought if Washington fails to come up with a solution.

Without Congressional action to avoid a “fiscal cliff,” Americans should expect a “significant recession” and the loss of some two million jobs, Congressional Budget Office director Doug Elmendorf said in his gloomiest assessment yet.

He said the economy is already being “held back” by the mere anticipation of the cliff and the uncertainty surrounding it. “The sooner that uncertainty is eliminated, the better,” said Elmendorf.

The report could intensify the pressure on Congress and the White House to resolve their differences. But the likelihood of a resolution any time soon, particularly before the November election, is seen as slim. Chances could improve after the election for action during the lame-duck session of Congress, but that's unpredictable as well.

Neither Democrats nor Republicans have shown a willingness to back away from fixed positions on either budget cuts or extension of tax cuts originally enacted during the administration of George W. Bush.

The “cliff” refers to the impact of expiring tax cuts and automatic spending reductions set for 2013 as a result of successive failures by Congress to agree on some orderly alternative method of addressing the deficit.

The CBO said failure to avoid the cliff would deliver a shock to the economy that would cause US GDP to shrink 0.5% in 2013. Previously, the CBO had forecast full-year GDP growth of 0.5%.

The main reason for the gloomier outlook now versus the last estimate in May is weakness in the global economy, the growing uncertainty mentioned by Elmendorf about what Congress will do, and a determination that the cliff is somewhat steeper than the May estimate suggested.

That estimate did not include expiring payroll tax cuts and the end of extended unemployment benefits, the CBO said. Were Congress to resolve everything -the most optimistic scenario- the CBO said the economy would continue to grow, albeit weakly.

Economic growth under this optimistic scenario would be modest in 2013 at 1.7%, with an 8% unemployment rate compared with 9.1% should the US go over the fiscal cliff.

The CBO anticipates that the first half of next year will be particularly difficult, with US GDP shrinking by 2.9%, followed by a slight bounce-back with second half growth of 1.9%. But these are far worse than its previous projections of a 1.3% first-half contraction followed by 2.3% second-half growth.

As for the current fiscal year, which ends September 30, the agency shaved its US budget deficit forecast to 1.128 trillion dollars from 1.171 trillion, mostly due to lower-than-expected spending for the Medicare and Medicaid healthcare programs.