Congressional budget stalemate may spur recession, report states

By Alan Fram

Associated Press

Published: Wednesday, Aug. 22 2012 8:00 p.m. MDT

Elmendorf said his office has since lowered its expectations for economic activity. He said the economy was already showing signs of being hurt by uncertainty over the looming tax increases and spending cuts.

"We think that the economy right now is being held back by anticipation of this fiscal tightening," he said.

The report underscored that lawmakers face no easy answers.

While extending the tax cuts and avoiding the spending slashes would keep the economy stronger over the next two years, continuing those policies for the long term would produce annual budget deficits averaging almost $1 trillion for the next decade. That would produce debt totaling nearly $10 trillion for that period — pushing the government's cumulative debt to 90 percent of the size of the economy by 2022, a proportion unseen since just after World War II and widely considered badly damaging by economists.

That, said Elmendorf, "would put us on a path of federal debt that would ultimately be unsustainable."

Yet while ending the tax cuts and letting the spending cuts occur would cause quick economic damage, it would also produce more deficit reduction. If the tax cuts expire and spending reductions take place in January, next year's budget shortfall would be $641 billion — down from just over $1 trillion if the opposite occurs, the report said.

The budget office 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.

In two other findings that relate to this year's partisan battles, the budget office estimated that federal revenues — including income and payroll taxes — will reach 15.7 percent the size of the economy this year — well below the 18 percent average of the past 40 years.

Federal spending will hit an estimated 22.9 percent of the economy's size — above the 21 percent average of the past four decades.

Republicans say the government taxes and spends too much, assertions with which many Democrats disagree.

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