For Congress, the outlines of the pending fiscal crisis are clear: Don’t do a thing, and watch the economy slip into a double-dip recession early next year. Or cancel the looming tax increases and spending cuts, watch the deficit rise, and push the government ever closer to a European-style debt crisis.
That decision was put in stark terms Tuesday by the Congressional Budget Office, which in a new analysis said the economy will plunge into a recession early next year if Congress lets taxes rise and spending be cut, as called for under the law.
But if Congress changes the law to keep taxes low and spending high, it could add more than half a trillion dollars to the deficit in 2013, marking a fifth straight year of trillion-dollar deficits and risking the patience of the country’s creditors.
The CBO numbers come just as the debate is heating up on Capitol Hill over how to handle the looming “fiscal cliff,” which Congress created by continually pushing off tough decisions on both taxes and spending.
Senate Majority Leader Harry Reid, Nevada Democrat, signaled Tuesday that he will allow the automatic spending cuts called for in last year’s debt deal to go into effect — culling billions of dollars from defense and domestic spending — unless Republicans agree to allow taxes to increase on at least some taxpayers.
“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit-reduction package that asks millionaires to pay their fair share,” Mr. Reid said.
Republicans remain adamant that the lower income- and investment-tax rates passed in 2001 and 2003 under President Bush, and extended in 2010 under President Obama, must be extended again.
“No economy can sustain such a hit without being hurled into recession,” said Sen Orrin G. Hatch, the ranking Republican on the Senate Finance Committee, which oversees tax policy.
One thing both sides say they agree on, however, is the need to act now.
Last week, House Speaker John A. Boehner kicked off the conversation, drawing a line in the sand in saying that he won’t allow another increase in the federal government’s debt ceiling unless it’s matched dollar-for-dollar with future spending cuts — just as the 2011 debt deal was.
Mr. Boehner also signaled he was open to ending some special tax breaks, as long as the money was used to bring down tax rates for everyone. He acknowledged there would be some who would pay more and some who would pay less.
But Democrats said much of the extra money the government would generate by closing those loopholes should go to funding the promises already made on spending, such as Social Security, Medicare and regular domestic spending.
The government was projected to see a large surplus at the end of the Clinton administration, but several economic downturns, two wars, several rounds of tax cuts and trillions of dollars in new domestic spending erased the surplus and have left the government deeply in debt: $15.715 trillion as of Monday.
And for the past three years, as political gridlock has become the rule in Washington, lawmakers have put off decisions on cutting spending or raising taxes, leaving everything to bite at the beginning of 2013.
The list of expiring laws reads like a taxpayer’s worst nightmare: The alternative minimum tax would bite ever deeper, last year’s 2-percentage-point payroll-tax cut would disappear, business-investing tax breaks would end, and almost all of the 2001 and 2003 tax cuts would expire. Meanwhile, some tax increases from Mr. Obama’s health care law are slated to begin biting in January.
On the other side of the ledger, existing laws would lead to a drop in unemployment benefits, crippling cuts in payments to doctors who treat Medicare patients and automatic cuts to defense and domestic spending totaling $65 billion in 2013 — the so-called “sequesters” from last year’s debt deal.
The good news is those changes would cut the annual deficit by $560 billion, from $1.2 trillion this year to $612 billion in 2013. The bad news is that without the government pouring billions into the economy in spending, and without taxpayers keeping more money, which they, too, pump into the economy, gross domestic product will drop in early 2013 by 1.3 percent.
“Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession,” CBO warned.
CBO said the downturn would be brief and the economy would grow at 2.3 percent in the latter half of 2013 — but the prospect of a double-dip doesn’t sit well with either party.
• Stephen Dinan can be reached at firstname.lastname@example.org.
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