As lawmakers debate whether to allow the Bush tax cuts to expire, or to extend them for everyone but the wealthy, the CBO predicts that the federal budget deficit this year will total $1.1 trillion, making it the fourth consecutive of trillion dollar deficits.
This projection is down from the $1.2 trillion deficit the CBO predicted in March, and is only three-quarters the size of the deficit in 2009 when measured against the size of the economy.
U.S. debt held by the public will also increase to about 73 percent of gross domestic product, the highest it’s been since 1950 and twice as large as it was in 2007, before the financial crisis and recession.
The CBO also predicts that the unemployment rate will stay above 8 percent for the rest of the year, which is not a good sign for President Obama’s re-election campaign.
However, the CBO expects the economy to recover at a modest pace, growing about 2.25 percent in the second half of 2012.
Furthermore, sharp tax increases that are scheduled to occur in 2013, coupled with spending cuts would likely result in a “considerable recession.”
According to the CBO, “the sharp increases in federal taxes and reductions in federal spending that, under current law, are scheduled to begin in calendar year 2013 are likely to interrupt the recent economic progress, resulting in what would probably be considered a recession. That forecast is summarized in the table below.”
If this happens, the CBO predicts that the economy will shrink by 0.5 percent and the unemployment rate shoot up to 9.1 percent. The federal budget deficit will also be $500 billion less than the projected $1.1 trillion, as tax revenues increase and spending shrinks.
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