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Tax hikes, budget cuts could bring recession, budget office warns

Lower tax rates set to expire Dec. 31 and cutbacks scheduled for January could hamper economic growth if lawmakers fail to act, officials say.

May 23, 2012|By Lisa Mascaro, Los Angeles Times
  • Members of Congress outside the Capitol earlier this month.
Members of Congress outside the Capitol earlier this month. (Alex Wong / Getty Images )

WASHINGTON — The Congressional Budget Office warned that the country could be thrown into a recession if Congress tries to reduce the nation's deficit quickly with a combination of budget cuts and higher taxes scheduled to take place at the end of the year.

The nonpartisan budget office laid out the stark choices Tuesday over what has been called the coming fiscal cliff as congressional leaders square off in an expected partisan showdown from now through December.

The office warned that the growth of the nation's gross domestic product — the value of goods and services produced — would slow to just 0.5% next year if Congress did nothing. The economy would reach that rate by contracting at an annual rate of 1.3% in the first half of the year, then expanding at an annual rate of 2.3% in the second half.

"Such a contraction in output in the first half of 2013 would probably be judged to be a recession," the office wrote.

Past decisions have left Congress staring down difficult choices at the end of this year — all of them politically hazardous, especially in this era of partisan politics.

Lower tax rates first approved during the George W. Bush administration are set to expire Dec. 31, resulting in a tax increase across all tax brackets.

At the same time, steep spending cuts in nearly every aspect of the federal government are scheduled to begin in January as part of the agreement Congress and the White House reached last summer to raise the nation's debt limit.

Although deficit reduction has been a key issue among some voters, concerns over the economy and jobs remain at the top of most voters' minds, polls show.

The contours of a standoff already have come into view as Democrats push to raise taxes on wealthier Americans to bring down deficits and spare domestic programs from deep spending cuts. Republicans want to keep all tax rates low, including those for the wealthier households, and shift the burden of deficit-reduction onto domestic programs, sparing the Pentagon.

The nation's debt load doubled during the Bush administration, but skyrocketed under Obama during the recession. At $15.4 trillion, debt is approaching an unsustainable level, experts said.

lisa.mascaro@latimes.com

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