WASHINGTON - The U.S. is headed for a deep recession in the first half of 2013 if Congress fails to avert nearly $500 billion in tax hikes and federal budget cuts from the "fiscal cliff," the Congressional Budget Office warned Wednesday.
The "fiscal cliff" or "taxmaggedon" refers to the 2001 and 2003 Bush tax cuts set to expire at the end of the year and the more than $1 trillion in automatic spending cuts slated to go into effect in January.
"Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession," CBO analysts said, adding that the economy would shrink by 0.5% for fiscal year 2013.
The unemployment rate would rise from 8.2% to 9% in the second half of 2013.
"Whether lawmakers allow those policy changes to take effect or alter them will play a crucial role in determining the path of the federal budget over the next decade and the outlook for the economy in the near term and beyond," CBO analysts said.
Wednesday's forecast is considerably gloomier than the outlook from their Jan. 31 report which said that the fiscal cliff could trigger a modest recession but economic activity would quicken after 2013.
The U.S. budget deficit will reach $1.1 trillion this year, the fourth consecutive year with a deficit exceeding $1 trillion, the report said. This is a slight decrease from the $1.2 trillion deficit CBO projected in March.
Federal debt held by the public will reach 73% of GDP by the end of this fiscal year - the highest level since 1950 and about twice the share that it measured at the end of 2007, before the financial crisis and recent recession, budget analysts said.
Under current law baseline, the deficit would shrink to $641 billion in fiscal 2013.
The budget office said the economy will continue at "a modest pace" for the remainder of fiscal 2012, which ends on September 30, with inflation-adjusted gross domestic product growing at an annual rate of 2.25% in the second half of this year.
The unemployment rate will stay above 8% for the rest of the year and the rate of inflation in consumer prices will remain low, CBO estimated.
"Today's update of the Budget and Economic Outlook from CBO is another reminder that there is more to do to strengthen the economy and bolster our recovery," said Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee. "We must continue our efforts to put Americans back to work, protect the middle class, and reduce the deficit."