Budget office: 'Fiscal cliff' cuts, tax hikes would lead to recession

Austere "fiscal cliff" tax increases and federal spending cuts set for the end of the year would send the economy back into recession and cause a spike in the jobless rate to 9.1 percent by next fall, congressional budget analysts said Thursday.

The tax and spending changes, which a lame-duck session of Congress will dig into next week, would cut the federal deficit by $503 billion through next September, said the Congressional Budget Office report. But the adjustments also would cause the economy to shrink by 0.5 percent next year.

The report, updating an analysis from last May, comes as a newly re-elected President Obama and Congress seek ways to avert or at least ease possible damage from the scheduled changes. All sides are promising cooperation, but many difficult decisions await and the politics of raising tax revenue and cutting federal benefits programs is exceedingly tricky.

The new study estimates that the nation's gross domestic product would grow by 2.2 percent next year if the Bush-era tax rates were extended and would expand by almost 3 percent if Obama's 2 percentage point payroll tax cut and current jobless benefits for the long-term unemployed are extended.

All sides want to avoid the automatic austerity plan, which is a one-two punch of expiring tax cuts and major across-the-board spending cuts to the Pentagon and domestic programs. It is the looming punishment for previous failures of a bitterly divided Congress and White House to deal with the government's spiraling debt or overhaul its unwieldy tax code.

The largest component of the changes -- dubbed a "fiscal cliff" to be avoided if possible -- comes with the expiration of tax cuts enacted in 2001 and 2003 and extended two years ago after Obama's drubbing in the 2010 midterm elections. Extending the full range of Bush tax cuts would cost the government $330 billion through the September end of the 2013 budget year.

Republicans want to temporarily renew all of the Bush tax rates, but Obama wants to hike the top two income tax rates to Clinton-era levels. The top tax rate is now 35 percent; Obama would raise that to 39.6 percent. If the rival sides can't enact a bargain by January, the full menu of tax cuts would expire.

Seeking to quell concerns voiced by conservatives about Republican lawmakers possibly caving to Democrats on tax policy, Senate Minority Leader Mitch McConnell, R-Ky., said he is unwilling to consider raising taxes.

"I know some people out there think Tuesday’s results mean Republicans in Washington are now going to roll over and agree to Democrat demands that we hike tax rates before the end of the year. I’m here to tell them there is no truth to that notion whatsoever," McConnell said in a statement provided to Breitbart.com.

The spending cuts would be imposed as a consequence of the failure of last year's deficit-reduction "supercommittee" to reach agreement. There are other elements, chiefly a 2 percentage point cut in payroll taxes orchestrated by Obama and unemployment benefits for the long-term jobless that would disappear.

Extending the payroll tax relief and renewing the long-term unemployment benefits would add another $108 billion to the deficit through September. It's unclear whether lawmakers will seek to avert that in the upcoming deal-brokering.

"Today's CBO report underscores the need to prevent the so-called fiscal cliff from harming American families and businesses, and to instead enact a balanced, long-term deficit reduction plan," said top House Budget Committee Democrat Chris Van Hollen of Maryland. "We must take a balanced approach that includes cuts to spending and cuts to tax breaks for millionaires and special interests that we can no longer afford."

The Associated Press contributed to this report.