Fiscal measures designed to tame the U.S. budget deficit could drive unemployment above 9% and trigger a recession, says a report from the non-partisan Congressional Budget Office.
It reveals substantial changes to tax and spending policies will take effect in January 2013, and that they’ll “significantly reduce the U.S. federal budget deficit. [But] according to CBO’s projections, if all of that fiscal tightening occurs, real inflation-adjusted GDP will drop by 0.5% in 2013.”
The drop will occur due to a decline in the first half of next year, which will be followed by renewed growth at a modest pace in only the last few months. Further, when the U.S. economy contracts, analysts say [its] unemployment will increase to 9.1%.”
But don’t despair. The report also says growth will pick up in 2014 and the labour market will continue to strengthen from that point forward. By 2018, U.S. unemployment should drop to 5.5%.
And though the removal of fiscal tightening would give the economy a jumpstart in the short term, the CBO says, “Even if all of the fiscal tightening was eliminated, the economy would remain below its potential. [This action] would also cause a continued surge in federal debt during the rest of this decade, which would raise the risk of a fiscal crisis.”