According to the Financial Times, a new report from the nonpartisan Congressional Budget Office says that its original calculations of the impact of the fiscal cliff significantly understated the risks and the situation is far worse than it thought:
The US will be plunged into recession next year if Congress fails to strike a deal to avert the looming “fiscal cliff”, with the economy contracting at a rate of 0.5 per cent in 2013, according to congressional analysts.The projection by the Congressional Budget Office is substantially bleaker than its projection at the end of May, in which it forecast that the US economy could suffer a recession early next year but would rebound strongly enough in the second half to ensure tepid growth of 0.5 per cent for the full calendar year.
The U.S. economy will tumble over the fiscal cliff—a catastrophic, simultaneous combination of expiring tax cuts and automatic spending cuts—on January 1 unless a bipartisan deal is reached. Voters need to push every politician running for national office to explain exactly what they intend to do to prevent an entirely artificial and unnecessary disaster from engulfing the land.But as the magic date approaches, we are likely to see some precursor effects. A business that sees a 50/50 chance of a recession starting in January isn’t going to spend a lot of money in September. Consumers are less likely to make big ticket purchases, and small businessmen will start curtailing their hiring well before the New Year.This probably does not mean we can expect quick action from our political class, however. Reach for the life jackets, America. The politicians are steering us straight for the rocks.