WASHINGTON—Tax increases and spending cuts scheduled to take effect in January 2013 would slow the economy and raise unemployment next year unless policy makers strike a deal to keep those changes from kicking in or offset their impact, the Congressional Budget Office warned.
But while such an agreement would boost the economy in the short term, it also would expand the federal budget deficit over time if not combined with other policy changes, the nonpartisan CBO said.
Policy makers will have to decide soon how to handle the near-term economic strains as well as the future problems caused by rising government debt, CBO Director Douglas Elmendorf said.
"The longer that we wait as a country to make the sort of choices that we have to make, the harder it will be to make them," he said.
The agency, in its semiannual budget and economic forecast, projected a $1.2 trillion federal deficit for fiscal year 2012, which ends Sept. 30, if Congress—as expected—extends the temporary payroll-tax cut through the end of this year. The deficit would be slightly smaller than in recent years but still huge by historical standards.
Republicans seized on the report, particularly the fourth straight projected deficit of more than $1 trillion, saying it was evidence President Barack Obama wasn't doing enough to reduce government spending and expand the economy. "The president needs to be proposing a way out of this," Sen. Jeff Sessions of Alabama, the Senate Budget Committee's top Republican, said in an interview. "He needs to be leading."
White House spokesman Jay Carney said Mr. Obama has tried to put in place broad deficit-reduction deals but has been blocked by Republicans at multiple turns, particularly over the issue of tax increases. "What has been lacking thus far is any willingness to deal with revenue in any meaningful way by the Republicans," Mr. Carney said. "And that is just not the approach that the broad base of the American public feels is the right way to go."
The two parties are starkly at odds over how best to address the dual challenge of spurring economic growth while trying to reduce looming deficits. Democrats have advocated more short-term spending to jump-start growth, combined with tax increases on the wealthy, while Republicans have called for deep spending reductions and the preservation of temporary tax cuts. The CBO report suggested there was no easy way out of the country's fiscal problems, and offered fresh details of the trade-offs.
The CBO predicted U.S. gross domestic product, the value of all goods and services produced, would grow a modest 2.3% this fiscal year if the payroll-tax cut were extended through December.
But growth would slow to just 1.1% in fiscal 2013, which starts Oct. 1, if a number of tax cuts were allowed to expire at the end of this year and if across-the-board government spending cuts take effect as scheduled, the CBO said.
If the tax cuts expire, individuals and companies would pay $2.99 trillion in taxes next fiscal year—$465 billion more than in 2012. The spending cuts, set to kick in starting in January, are worth $1.2 trillion over 10 years.
If no agreement is reached to extend the tax cuts and block the spending curbs, unemployment would rise to 8.9% by year-end from 8.5% now, and hit 9.2% at the end of 2013, the CBO said.
"Taken together, those policies will generate a sharp fiscal contraction," Mr. Elmendorf said. If the tax cuts were extended and the spending cuts reversed, the CBO projected that the economy would grow at a healthier 3% clip in 2013 and the jobless rate would be closer to 8%. But reversing the cuts would produce "unsustainable" deficits in the future, Mr. Elmendorf said.
Under the first scenario—with Bush-era tax cuts and other measures allowed to expire at the end of this year and the spending cuts left in place— the total federal debt would grow by roughly $3.1 trillion over the next 10 years, the CBO said. But under the second scenario—with tax increases and spending cuts reversed and other temporary policy measures continued—the debt would grow by $11 trillion over that time span.
Mr. Elmendorf warned that the primary driver of the deficit later this decade would be the cost of an aging U.S. population, particularly the rising costs of government health-care programs. For example, the CBO projected the government would spend $1.6 trillion on Social Security, Medicare, and Medicaid in 2012, 44% of the federal budget. In 2022, the government will spend $3.0 trillion on those programs, 54% of the federal budget.
WSJ
But while such an agreement would boost the economy in the short term, it also would expand the federal budget deficit over time if not combined with other policy changes, the nonpartisan CBO said.
Policy makers will have to decide soon how to handle the near-term economic strains as well as the future problems caused by rising government debt, CBO Director Douglas Elmendorf said.
"The longer that we wait as a country to make the sort of choices that we have to make, the harder it will be to make them," he said.
The agency, in its semiannual budget and economic forecast, projected a $1.2 trillion federal deficit for fiscal year 2012, which ends Sept. 30, if Congress—as expected—extends the temporary payroll-tax cut through the end of this year. The deficit would be slightly smaller than in recent years but still huge by historical standards.
Republicans seized on the report, particularly the fourth straight projected deficit of more than $1 trillion, saying it was evidence President Barack Obama wasn't doing enough to reduce government spending and expand the economy. "The president needs to be proposing a way out of this," Sen. Jeff Sessions of Alabama, the Senate Budget Committee's top Republican, said in an interview. "He needs to be leading."
White House spokesman Jay Carney said Mr. Obama has tried to put in place broad deficit-reduction deals but has been blocked by Republicans at multiple turns, particularly over the issue of tax increases. "What has been lacking thus far is any willingness to deal with revenue in any meaningful way by the Republicans," Mr. Carney said. "And that is just not the approach that the broad base of the American public feels is the right way to go."
The two parties are starkly at odds over how best to address the dual challenge of spurring economic growth while trying to reduce looming deficits. Democrats have advocated more short-term spending to jump-start growth, combined with tax increases on the wealthy, while Republicans have called for deep spending reductions and the preservation of temporary tax cuts. The CBO report suggested there was no easy way out of the country's fiscal problems, and offered fresh details of the trade-offs.
The CBO predicted U.S. gross domestic product, the value of all goods and services produced, would grow a modest 2.3% this fiscal year if the payroll-tax cut were extended through December.
But growth would slow to just 1.1% in fiscal 2013, which starts Oct. 1, if a number of tax cuts were allowed to expire at the end of this year and if across-the-board government spending cuts take effect as scheduled, the CBO said.
If the tax cuts expire, individuals and companies would pay $2.99 trillion in taxes next fiscal year—$465 billion more than in 2012. The spending cuts, set to kick in starting in January, are worth $1.2 trillion over 10 years.
If no agreement is reached to extend the tax cuts and block the spending curbs, unemployment would rise to 8.9% by year-end from 8.5% now, and hit 9.2% at the end of 2013, the CBO said.
"Taken together, those policies will generate a sharp fiscal contraction," Mr. Elmendorf said. If the tax cuts were extended and the spending cuts reversed, the CBO projected that the economy would grow at a healthier 3% clip in 2013 and the jobless rate would be closer to 8%. But reversing the cuts would produce "unsustainable" deficits in the future, Mr. Elmendorf said.
Under the first scenario—with Bush-era tax cuts and other measures allowed to expire at the end of this year and the spending cuts left in place— the total federal debt would grow by roughly $3.1 trillion over the next 10 years, the CBO said. But under the second scenario—with tax increases and spending cuts reversed and other temporary policy measures continued—the debt would grow by $11 trillion over that time span.
Mr. Elmendorf warned that the primary driver of the deficit later this decade would be the cost of an aging U.S. population, particularly the rising costs of government health-care programs. For example, the CBO projected the government would spend $1.6 trillion on Social Security, Medicare, and Medicaid in 2012, 44% of the federal budget. In 2022, the government will spend $3.0 trillion on those programs, 54% of the federal budget.
WSJ
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