'Fiscal cliff' plan will send US into recession

The US Congress's budget analysts said Wednesday that current policies designed to slash the budget deficit after January 1 will plunge the country into recession and push up joblessness. The Congressional Budget Office said the budget plan agreed in a political deal last year -- sharp cuts to spending and tax increases that will hit household finances -- will cause the economy to shrink by 0.5 percent in the fist half of the 2013 fiscal year that begins October 1. It would also likely send the unemployment rate to 9.1 percent by the second half of fiscal 2013, from the current already-high 8.3 percent, the CBO said. The plan -- known as the "fiscal cliff" because of the sharp return to recession also predicted by private-sector economists -- would succeed in cutting some $500 billion from the budget deficit next year. The deficit was estimated at $1.1 trillion for this fiscal year, the CBO said. But the current economic current growth trajectory of about 2.25 percent would abruptly halt under the current law, the Budget Control Act of 2011, and the scheduled January expiration of temporary tax breaks. "The outlook for the budget deficits, federal debt, and the economy are especially uncertain now because substantial changes to tax and spending policies are scheduled to take effect in January 2013," the CBO said. "Fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013, and the unemployment rate rising to about 9 percent," it said. The CBO gave alternative, more encouraging growth scenarios should adjustments be made to the existing law. But since the August 2011 deal -- a poison-pill agreement never meant to remain in place but to force a more palatable deal between battling Democrats and Republicans -- politicians have not been able to agree on how to replace it. And with the issues of debt and taxes at front and center in the presidential election campaign, neither side is likely to give in on a compromise before the November 6 vote. But that will give Congress only a few weeks to reverse from the fiscal-cliff course before it is to come into effect beginning January 1 -- a fact that has businesses, investors and politicians increasingly worried. If the fiscal-cliff policies are changed, so that current tax policies largely stay in place and the forced budget cuts do not take effect, the CBO predicted the economy would remain stronger in 2013 with growth around 1.7 percent and the jobless rate at 8.0 percent. However, it said, the government's deficit would again hit $1 trillion, and government borrowing would continue to weigh on the economy over the medium term.