CBO made the prediction in its annual summer budget update Wednesday.
“But the sharp increases in federal taxes and reductions in federal spending that are scheduled under current law to begin in calendar year 2013 are likely to interrupt the recent economic progress,” CBO said.
“By CBO’s estimate, that fiscal tightening will probably lead to a recession in 2013 and to an unemployment rate that remains above 8 percent through 2014.”
While CBO included mandatory spending cuts from the federal budget sequester (the “fiscal cliff”) in its analysis, the vast majority of the impact to the economy will come from the tax increases – the expiration of the Bush tax cuts -- due to their sheer size.
CBO estimated that the combination of spending cuts and tax increases would reduce the federal deficit by $487 billion in fiscal 2013, with the vast majority of that figure coming from tax increases.
CBO projects that if current tax policies are kept in place and do not expire in 2013 as scheduled, revenues would be $5 trillion less between 2012 and 2022.
Congress is not expected to address either the mandatory spending cuts or the expiration of the Bush tax rates until after the election.