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Recession averted, but rising debt still a threat, CBO warns

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The CBO's current-law "baseline" calls for spending to reach about 23 percent of GDP in 2023 and, more worrisome, to be "on an upward trajectory."
Congress's bean counters don't get formally involved in policy debates, but this report provides important context for both sides in a contentious debate over a "sequester" (automatic spending cuts) that is scheduled to hit much of the federal budget on March 1.

Many Democrats want to withdraw from the sequester, to avoid sharp cuts in useful discretionary programs and to avoid a needless slowdown of the economy. Many Republicans support the cuts, or some similar show of spending restraint, as a way to buoy private-sector confidence that the nation can get its fiscal house in order.

Economists differ on how the sequester would affect the economy, if it goes into effect. For its part, the nonpartisan CBO estimated that the spending cuts would have a sizable cooling effect in 2013 – about 0.6 percent of GDP – but not to the point of causing a recession. The tax hikes contained in January's fiscal-cliff deal, the CBO estimated, will further slow GDP for the year by a similar amount.

In that deal, Congress pushed taxes higher for high-income earners, while making Bush-era tax rates permanent for the vast majority of Americans. The cliff deal also allowed a temporary 2 percent payroll-tax break for US workers to expire.

The good news in the fiscal-cliff deal was that a recession may have been averted.

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