Sequesters, tax increases would cause double-dip recession

The automatic spending cuts and tax increases slated to take effect at the end of this year would cut the federal deficit dramatically, but would send the country back into a short recession, according to the latest analysis from Congress’s official scorekeepers.

The Congressional Budget Office report frames the difficult choice for Congress and President Obama as they approach what some have termed a looming “fiscal cliff”: increasing the deficit now can help the economy, but it will come at the price of an ever-worsening debt situation.

“Reducing or eliminating the fiscal restraint would boost economic growth in 2013, but that adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run,” CBO said in its analysis.

If Congress does nothing, the automatic spending cuts and tax increases on Jan. 1 would reduce next year’s deficit by $560 billion in fiscal years 2012 and 2013.

But with less money being pumped into the economy by spending, and less money left in taxpayers’ wallets to invest, the dent to the economy could be severe: gross domestic product would fall 1.3 percent at the beginning of 2013, which would mean the economy is in a recession. CBO said by the end of 2013 the economy would likely rebound into growth territory.

The warning comes as politicians on Capitol Hill have begun drawing lines over how to handle a potential year-end calamity: The tax cuts are set to expire, the automatic spending cuts set in place by last year’s debt deal will begin to bite, and the government will once again bump up against its borrowing limit.

The GOP has called for most of the tax cuts to be extended and for defense spending cuts to be erased — which means ever-deeper cuts to domestic spending.

On Tuesday Senate Majority Leader Harry Reid, Nevada Democrat, shot back in a letter saying there can be no deal on erasing the defense cuts unless the GOP accepts higher taxes on the wealthy and on corporations.