Business

US 'risks recession' if tax rises and spending cuts hit

Capitol Hill (file pic)
Image caption Deadlock in Congress in saw mandatory spending cuts imposed for the end of 2012

The US could fall off a "fiscal cliff" if tax rises and spending cuts due to take effect at the end of 2012 are not avoided, auditors have said.

The US economy could go in to recession, shrinking at a rate of 1.3% in the first half of 2013, the Congressional Budget Office said .

Expiring Bush-era tax cuts are due to be amplified by $1.2tn (£760bn) of spending cuts due on 1 January.

Analysts say the issue could provoke a partisan stand-off in election season.

The US Treasury department has already signalled that the national debt ceiling will need to be raised early in 2013.

The last such rise triggered a political crisis in Washington as agreement eluded lawmakers and President Obama for much of the summer of 2011.

Contraction concern

The combination of rising taxes and deep cuts to domestic and defence spending are already on the minds of lawmakers on Capitol Hill.

If both are allowed to come into full effect the US deficit would be cut by some $607bn, the CBO estimated.

However, the combination of higher taxes on the middle class and the wealthy, as well as spending cuts, would severely impact the size of the US economy, the report added.

"Such a contraction in output in the first half of 2013 would probably be judged to be a recession."

However, the estimate also said the US could expect economic activity to return to 2.3% growth in the second half of 2013.

The CBO did not directly address the issue of the debt limit. But last week House Speaker John Boehner signalled that Republicans would not allow a rise in the debt ceiling without offsetting spending cuts.

Correspondents say it is unlikely that Congress and the White House will take action before the presidential election on 6 November.