'Fiscal cliff' would plunge the US back into recession – Congress

The Congressional Budget Office warns of grim consequences for GDP and employment if planned tax increases and spending cuts come into force on January 1.

If re-elected United States President Barack Obama does not reach an agreement with Congress on the impending "fiscal cliff", the US economy risks going back into recession, according to a report just released.

The "fiscal cliff" – a term first used by Federal Reserve chairman Ben Bernake in February – refers to a tipping point on January 1, 2013, when major spending cuts are due to come into force at the same time as the Bush-era tax cuts expire.

The Congressional Budget Office, which provides economic data to Congress, says the combination of a sharp tax increase and spending cuts would cut the federal deficit by $503 billion – which was expected to hit $1.1 trillion this year – through to next September.

However, that would also cause the economy to shrink by 0.5%.

The economic slowdown associated with the spending cuts and tax increases would lift unemployment to 9.1% by Q4 2013 from 7.9% now, the CBO says.

A lame-duck session of Congress will discuss the dilemma next week.

Mr Obama is up against a hostile Republican-controlled Congress which opposes tax increases and wants broad spending cuts.

But speaker John Boehner has given his strongest indication yet the two sides could reach an agreement, saying Congress could agree to some tax increases, but not to the top rate, and only if they are coupled with spending cuts.

"Because the American people expect us to find common ground, we are willing to accept some additional revenues via tax reform," Mr Boehner says, as reported by the Australian Financial Review.

The Bush-era tax cuts were extended in 2010 for two years.

If they were to be extended as they are, they would cost the government $330 billion through to September, the end of the 2013 budget year.

Mr Obama wants to increase the top two income tax rates to 39.6%, up from the top rate of 35% now. 

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