CBO Expects 2013 "Fiscal Cliff" Recession Because of Automatic Spending Cuts and Tax Hikes

Automatic tax hikes and spending cuts will go into effect in 2013 causing a “fiscal cliff” recession according to the CBO.

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, Congress’ budget referee said on Wednesday.

The Congressional Budget Office said failure to avoid the so-called “fiscal cliff” of expiring tax cuts and automatic spending reductions would cause U.S. gross domestic product to shrink 0.5 percent in 2013. Previously, the non-partisan CBO forecast full-year GDP growth of 0.5 percent.

The first half of 2013 will be particularly difficult, the CBO said in its mid-year forecast update. Tax hikes and spending cuts will cause GDP to shrink 2.9 percent in the first half, compared with a prediction in May for a 1.9 percent contraction.

There will still be a slight bounceback in the second half of 2013, but it will be weaker, with growth of only 1.9 percent, compared with a previous forecast of 2.3 percent growth.

The main reason for the gloomier outlook is that the fiscal cliff is steeper than CBO previously estimated because of extensions earlier this year of a payroll tax cut and federal unemployment benefits, the CBO said.

It also said the general global and U.S. economic outlooks have dimmed since its last report, another factor weighing on its projections.

I think the US is in recession right now and it’s just a matter of when the NBER backdates it. The amusing thing is the CBO is looking for a “solution”.

There is no solution. The US is a fiscal train wreck waiting to happen,  More government spending is not the solution, it’s the problem.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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