If Congress doesn't avoid a sequester, the CBO warns of a recession in 2013. CBO warns of 2013 recession

What would happen if a deadlocked Congress did nothing?

If the expiring Bush tax rates are allowed to lapse and the automatic spending cuts kick in next year, it could hurl the U.S. economy back into a recession, the Congressional Budget Office warned in a report released Tuesday.


Calling the combination a “fiscal cliff,” the CBO estimated that the economy will most likely contract by 1.3 percent in the first half of 2013 if lawmakers allowed the tax rates to go up and the across-the-board cuts – called a sequester – to take effect. The CBO said the economy will grow at about 2.3 percent in the second half of 2013 under this scenario.

“Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession,” according to the CBO’s report.

GDP growth for 2013 overall would equal about .5 percent, the CBO projected.

Doing nothing would also slice the federal deficit dramatically, according to the CBO, which is Capitol Hill’s nonpartisan budget scorekeeper. Tuesday’s report estimated that the deficit would drop by $607 billion between fiscal 2012 and fiscal 2013 with the higher tax rates and spending cuts. If the economic effects of the so-called “fiscal cliff” were taken into effect — such lower tax revenues and increased spending on jobless benefits — the deficit would be reduced by $560 billion, according to the CBO.

Congressional Republicans and Democrats agree that action needs to be taken on the Bush tax rates and the sequester, but they clash on how, and those differences will most likely be hashed out in a lame-duck session. In a statement after the report’s release, Senate Majority Leader Harry Reid (D-Nev.) said this issue could be resolved “tomorrow” if Republicans agreed to extend the tax rates for the middle class but not for the wealthy.

“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit reduction package that asks millionaires to pay their fair share,” Reid said.