In its annual summertime report, the budget office said Wednesday that letting decade-old tax cuts expire and sweeping spending cuts occur in January — which will happen without congressional action — "would lead to economic conditions in 2013 that will probably be considered a recession."
If that happened, the economy would contract by 0.5 percent — a gloomier projection than the budget office made earlier this year when it envisioned slight growth under that scenario. Unemployment would rise to around 9 percent by late next year if the standoff persists, the analysts said.
The budget office's latest warning came amid a presidential and congressional election year in which neither President Barack Obama nor congressional Republicans have shown any signs of giving ground in their protracted battle over taxes, spending and the budget. The lethargic economy and massive federal deficits are top-flight issues in this year's campaigns.
Obama wants to renew expiring tax cuts for everyone except individuals earning over $200,000 and couples who bring in above $250,000. Republicans are demanding that all tax cuts be extended. The two sides also have made no progress over how to prevent budget-wide spending cuts from taking effect. These automatic cuts were sat in motion by the failure of lawmakers last year to reach a bipartisan debt-reduction agreement.
Letting the tax cuts continue and preventing the spending cuts from taking effect would leave a deficit next year of just over $1 trillion. If the reverse occurs, the shortfall would be $641 billion — in effect sucking roughly $400 billion out of a U.S. economy that is already struggling.
Though continuing the tax cuts and blocking the spending cuts would produce higher economic growth over the next two years, "it would reduce output and income in the longer run and is ultimately unsustainable," the budget office warned.
Wednesday's report projected a $1.1 trillion federal deficit for 2012, the fourth straight year the government's shortfall will exceed $1 trillion.
It also envisions an economy recovering at only a modest pace the rest of this year, growing at an annual rate of 2.25 percent.