Report says US economy on course for new recession in 2013

22 August 2012 18:11  [Source: ICIS news]

WASHINGTON (ICIS)--The US economy will tumble into a new recession early in  2013 unless Congress acts soon to resolve automatic tax increases and mandated budget cuts that are scheduled to kick in with the new year, a congressional study said on Wednesday.

In its regular mid-year budget and economic outlook, the Congressional Budget Office (CBO) said that more than $600bn (€480bn) in tax increases and federal outlays due on 1 January will leave consumers with less spending money and withdraw federal funds from the economy, resulting in at least a 0.5% decline in the nation’s gross domestic product (GDP).

 The CBO’s warning about the so-called “fiscal cliff” largely echoes a similar alarm issued by Federal Reserve Board chairman Ben Bernanke in July.

The fiscal cliff includes expiration of Bush administration tax cuts, which will mean an effective increase in tax rates from the current 35% maximum to nearly 40% and take an additional $221bn from taxpayers.

Tax rates also will automatically increase on capital gains and estates, and millions more US income earners will be subjected to the alternative minimum tax (AMT), which imposes taxes on households even if they have legitimate deductions – medical bills, mortgage interest payments, financial losses, etc. – that ordinarily would mean they owe no federal income taxes.

A 32% reduction in the amount of money taken from paychecks for the US Social Security retirement system also expires at year end, and a new 3% income tax will kick in to support the national health care programme.

Under the Budget Control Act of 2011, about $400bn in federal budget cuts are mandated beginning with the new year, with half of that to be taken from US defence spending and the balance from other federal programmes.

Those tax increases and spending cuts, said the CBO analysis, will sharply reduce the federal budget deficit in fiscal year 2013, cutting the federal red ink figure to about $641bn compared with this year’s estimated $1,100bn deficit.

But the consequences of taking about $600bn out of the economy, said CBO, will be sharp reductions in consumer spending, business activity and production and a resulting downturn in GDP – a new recession.

Both Republicans and Democrats in Congress agree that steps should be taken to avert the fiscal cliff, but the two parties have thus far been unable to agree on how to avoid going over the looming economic edge. 

Democrats want to raise taxes on upper-income earners and business, especially energy firms, but Republicans oppose any tax increases and instead insist on a long-term plan to gradually reduce federal government spending.

The US government spends about $10bn each day, but federal revenues amount to only some $6bn per day, meaning that Uncle Sam is borrowing $4bn every day by issuing ever more US Treasury bonds.

The CBO report also noted that because of that borrowing, the US national debt will reach about $16,000bn by the end of this year, more than the country’s estimated 2012 GDP of $15,500bn.

The CBO assists Congress in preparing economic reports, but in keeping with its mandate to provide objective and impartial analysis it provides no policy  recommendations.

($1 = €0.80)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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