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CBO on 'fiscal cliff': newest estimate is gloomiest yet

The CBO, Congress's budget watchdog, warns that the US economy will 'probably' slide back into recession, if the tax hikes and spending cuts mandated for year's end take effect.

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Sheila Bird (r.) waits in line for employment interviews at a job fair at City Target in Los Angeles on Aug. 17. The jobless rate in Los Angeles County was 11.2 percent in July. Without congressional action on the 'fiscal cliff,' the Congressional Budget Office projects that the national unemployment rate will top 9 percent by December 2013.

Nick Ut/AP

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Every time the Congressional Budget Office recalibrates its projections for the economic impact of the nation’s impending "fiscal cliff," the picture gets bleaker.

That’s the headline news from Wednesday’s CBO update on its budget outlook for the next decade: The $560 billion mix of spending cuts and tax hikes that make up the year-end fiscal cliff will "probably" cause a recession in 2013, as the economy would shrink by 0.5 percent for the year.

And not only are the impacts of going over the cliff worse, but the CBO also believes the American economy will be weaker overall even if Congress punts on all of the nation’s pressing issues of taxing and spending by pushing off the expiration of tax breaks and the beginning of spending cuts for a year or longer.

Why? First, the economy is not moving as quickly as the CBO expected it would early in 2012. Second, policies enacted after the CBO’s early-year forecast, such as a one-year extension of the payroll tax cut and emergency unemployment benefits, helped GDP growth this year but their expiration at year's end will lower it in 2013. 

Moreover, uncertainty about how the fiscal cliff will play out is already hurting spending by both businesses and consumers. The CBO’s 2012 economic outlook holds that some households will "probably pull back on spending later in the year in response to rising concerns about the effects of the future fiscal tightening.”

Likewise, while business investment is currently growing “strongly” and is “supported by favorable conditions in markets for corporate borrowing,” it is also being “restrained by businesses’ concern about possible major changes in fiscal policies.”

Many economists have recently ascribed at least some part of the slowing economy to uncertainty over the fiscal cliff, as the Monitor previously reported.

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