Congressional Budget Office (CBO) predicts that if tax rates rise in 2013 as scheduled, the economy will fall back into recession, shrinking by 0.5 percent in 2013.
CBO made the prediction in its annual summer budget update Wednesday.
“But the sharp increases in federal taxes and reductions in federal spending that are scheduled under current law to begin in calendar year 2013 are likely to interrupt the recent economic progress,” CBO said.
“By CBO’s estimate, that fiscal tightening will probably lead to a recession in 2013 and to an unemployment rate that remains above 8 percent through 2014.”
While CBO included mandatory spending cuts from the federal budget sequester (the “fiscal cliff”) in its analysis, the vast majority of the impact to the economy will come from the tax increases – the expiration of the Bush tax cuts — due to their sheer size.