Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday.
Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year.
Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth.
The report, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013,” comes as policymakers are bracing for the most consequential battle over government tax and spending policies in years. The George W. Bush-era tax cuts are set to expire on Dec. 31, along with a payroll tax cut proposed by President Obama. Meanwhile, sharp cuts are scheduled to hit the Pentagon and other federal agencies to meet a deal cut during last summer’s showdown over the nation’s debt limit.