Allowing Bush-era tax cuts to expire coupled with a scheduled round of automatic spending cuts would probably throw the U.S. economy into a tailspin. That's the dire warning from a new Congressional Budget Office report that says the economy would contract by 1.3 percent in the first half 2013, pushing off a "fiscal cliff" on Jan. 1.
That's when a higher tax rate would kick in if the Bush-era tax cuts aren't extended and more than $100 billion in automatic cuts in domestic spending for agencies such as the Pentagon are kept in place.
"Simply extending all of our current tax and spending policies will produce unsustainable deficits and debt, which will also send the economy into decline," Rep. Chris Van Hollen, D-Md., the top Democrat on the Budget Committee, told the Associated Press. "We need to act and we must do so in a balanced way."
Though lawmakers are expected to head off a shift in the government's financial situation later this year or in early 2013, the CBO says if nothing is done it would likely push the US economy into recession and wring hundreds of billions of dollars from the budget deficit. That would "represent an additional drag on the weak economic expansion," the CBO says.
The CBO is a nonpartisan agency of Congress that produces economic analysis and estimates of the cost of legislation.
Last summer's debt and budget agreement imposed almost $1 trillion in cuts to agency budgets over the coming decade and required automatic cuts of another $1 trillion or so.
The CBO study comes as Congress is gridlocked over spending and taxes in advance of the fall elections. The White House and top Democrats are refusing to act on the expiring tax cuts and automatic spending cuts unless Republicans show greater flexibility on raising taxes.
If no deal is reached, the CBO projects that the economy would shrink by 1.3 percent in the first half of 2013, which would meet the definition of a recession, which is when the economy shrinks for two consecutive quarters.
"Such a contraction in output in the first half of 2013 would probably be judged to be a recession," CBO said.
The Associated Press contributed to this report.