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CBO Sees Recession if Debt-Deal Pain Imposed

May 24, 2012

This is an excerpt from Executive Insight Briefing, produced every Thursday by the National Journal’s Daily Briefings Team.

The nonpartisan Congressional Budget Office’s early verdict on what would happen to the U.S. economy if Congress and President Obama can’t obviate steep tax hikes and dramatic spending cuts by the end of the year was unsurprising: recession.

The CBO, reporting on Tuesday, forecast the rate of economic growth to contract to an annualized 1.3 percent for the first six months of 2013, before perking back up to 2.3 percent for the second half of the year.

On the other hand, preventing the Bush tax cuts from expiring and blocking the sequestration cuts would fortify the recovery and lead to roughly 4.4 percent growth next year, according to the CBO, which also advised longer-term deficit reduction that would ameliorate the federal debt.

These will be the assignments of the lame-duck Congress, where Republicans will look to shield the Bush tax cuts from expiration and shift the sequestrations from the Pentagon to domestic programs, and where Obama has sought to hold hostage the tax cuts for households earning over $250,000.

Because of the dramatic consequences, both fiscal and economic, the combination of cuts and hikes were designed, under last year’s debt-ceiling deal, to act as motivational tools to prompt action on the Hill and avert what’s become known as “Taxmageddon.”

CBO laid out what multifaceted strategies policymakers might pursue if they “wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist”: They could impose  “changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.”

Since epiphanies in CBO scores often portend bad news, the surprisingly strong wording of this week’s score drew notice. But such draconian fiscal measures would be certain to wreak havoc, and are in fact designed to frighten policymakers into making the hard calls needed to avert them. Such evasive maneuvers are unlikely before the November election. But this week’s preemptive chidings help establish parameters for the lame-duck session.

Read the complete May 24, 2012, edition of Executive Insight Briefing.

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