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CBO = "BHO Has To Go"

Mike

Well-known member
The Congressional Budget Office (CBO) predicts that if tax rates rise in 2013 as scheduled, the economy will fall back into recession, shrinking by 0.5 percent in 2013.

CBO made the prediction in its annual summer budget update Wednesday.

“But the sharp increases in federal taxes and reductions in federal spending that are scheduled under current law to begin in calendar year 2013 are likely to interrupt the recent economic progress,” CBO said.

“By CBO’s estimate, that fiscal tightening will probably lead to a recession in 2013 and to an unemployment rate that remains above 8 percent through 2014.”

While CBO included mandatory spending cuts from the federal budget sequester (the “fiscal cliff”) in its analysis, the vast majority of the impact to the economy will come from the tax increases – the expiration of the Bush tax cuts -- due to their sheer size.

CBO estimated that the combination of spending cuts and tax increases would reduce the federal deficit by $487 billion in fiscal 2013, with the vast majority of that figure coming from tax increases.

CBO projects that if current tax policies are kept in place and do not expire in 2013 as scheduled, revenues would be $5 trillion less between 2012 and 2022.

Congress is not expected to address either the mandatory spending cuts or the expiration of the Bush tax rates until after the election.
 

Mike

Well-known member
David Lawder

Reuters

7:22 p.m. CDT, August 22, 2012

WASHINGTON (Reuters) - Massive U.S. government 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, the Congressional Budget Office warned on Wednesday.

Without action by Congress to avoid a "fiscal cliff," Americans should expect a "significant recession" and the loss of some 2 million jobs, CBO director Doug Elmendorf said in his gloomiest assessment yet.

He said the economy is already being "held back" by the mere anticipation of the fiscal cliff and the uncertainty surrounding it, causing businesses to put off investment and hiring decisions.

"The sooner that uncertainty is eliminated, the better," Elmendorf told a news conference. "The stakes are very high in the fiscal policy decisions we're going to have to make very shortly."

The report from the nonpartisan agency should intensify pressure on Congress and the White House to resolve deep differences over cutting spending or extending tax cuts enacted during the George W. Bush administration.

But chances for a deal before the November 6 election are slim. They could improve during the post-election lame-duck session of Congress, but that's unpredictable as well.

Reactions to the report did not signal any signs of movement by Democrats or Republicans from entrenched partisan positions that form the basis of their campaigns.

"This is a challenging time for America and one thing I will do is I will finally cut federal spending, encourage growth and as a result of those two things get America to a balanced budget," Republican presidential hopeful Mitt Romney said on the campaign trail in Little Rock, Arkansas.

The CBO report, added Amanda Henneberg, a Romney campaign spokeswoman, is "another indictment of President Obama's economic policies that have resulted in overspending, increasing debt and a growing financial burden on the next generation."

White House Press Secretary Jay Carney batted the blame back to Republicans in Congress.

"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," Carney said in a statement.

WORST FISCAL TIGHTENING SINCE VIETNAM

The "fiscal cliff" refers to the impact of around $500 billion in 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 reducing budget deficits.

Failure to avoid it would spark U.S. fiscal tightening on a scale not seen since the 1969 tax increases to pay for the Vietnam War -- slamming the economy into recession as it did back then.

The CBO estimated that U.S. gross domestic product under this scenario would shrink 0.5 percent in 2013, with a crushing first-half contraction of 2.9 percent followed by a weak second-half rebound of 1.9 percent growth.

In a May estimate of fiscal cliff effects, the CBO had forecast full-year 2013 GDP growth of 0.5 percent, with a 1.3 percent first-half contraction and second-half growth of 2.3 percent.

The main reasons for the gloomier outlook now are a weaker global economy, the growing uncertainty mentioned by Elmendorf about what Congress will do, and a determination that the cliff is somewhat steeper than previously thought.

The May estimate did not include the effect of expiring payroll tax cuts and the end of extended unemployment benefits. Factoring in the end of those streams of cash to Americans would increase the shock to aggregate demand.

WEAK GROWTH UNDER EXTENSION

Were Congress to extend all current tax policies and simply halt the automatic spending cuts, as many Republicans have proposed, the CBO said the economy would continue to grow, albeit weakly.

GDP growth under this more optimistic scenario would be modest in 2013 at 1.7 percent, with an 8.0 percent unemployment rate compared with 9.1 percent should the U.S. go over the fiscal cliff.

But it would cause the deficit to remain above $1 trillion for a fifth consecutive year, versus a sharp fall to $641 billion under the fiscal cliff scenario. Elmendorf said keeping deficits this high would greatly increase the chances of a U.S. debt crisis that spikes interest rates higher, dramatically raising all borrowing costs.

The current fiscal year, which ends on September 30, is on track to produce a $1.128 trillion deficit, CBO said -- a slight reduction from its most recent estimate of $1.171 trillion.

Part of this reduction was due to lower spending on the federal health programs Medicare and Medicaid.

Helen Fessenden, an analyst with Eurasia Group, which tracks political risks for investors, noted that the CBO report showed some slightly better-than-expected revenue estimates, which could buy the U.S. Treasury a bit more time before the $16.4 trillion U.S. debt ceiling needs to be raised.

Currently, the Treasury expects to reach that limit around the end of the year, but can take extraordinary measures to stretch its borrowing capacity into early 2013.

The next major development on the fiscal cliff is a report due from the White House on September 6 that details programs where the Obama administration plans to concentrate the automatic spending cuts should they occur. Half of the $109 billion in cuts for 2013 will be borne by the military and half by domestic programs.
 
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