CBO: Under Current Law, Unemployment Will Rise Next Year to 9.1%

By Elizabeth Harrington | September 6, 2012 | 9:49am EDT

Congressional Budget Office Director Douglas Elmendorf testifies on Capitol Hill in Washington before the Senate Budget Committee hearing on the Budget and Economic Outlook: Fiscal Years 2011-2021. (AP Photo)

(CNSNews.com) – The Congressional Budget Office (CBO) is projecting that if changes in federal taxing-and-spending policies already enacted and set to take effect at the beginning of next year do in fact take place, the unemployment rate will climb to 9.1 percent.

In a report released on Aug. 22, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, CBO’s baseline projections show that by the fourth quarter of 2013 the national unemployment rate will be 9.1 percent.

The estimate is based on the assumptions that the automatic caps on federal spending mandated under the Budget Control Act will take effect and that the extensions of the Bush-era tax rates enacted in 2010 will also be allowed to expires as they are set to do after Dec. 31.

CBO also provides projections for an “alternative fiscal scenario,” in which the Bush tax rates are extended indefinitely, automatic spending cuts are averted and either the Medicare “doc fix” is reinstated or the current Medicare payment rates are extended.

Even in this scenario, which CBO calls “unsustainable,” the unemployment rate would still be about 8 percent by the end of 2013.

Deficits would be much higher under the alternative scenario as well, averaging about 5 percent of GDP rather than the projected 1 percent if the laws stay the same.

“The persistence of large budget deficits and rapidly escalating federal debt” would “hinder national saving and investment,” CBO said.

“Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective,” the report concluded.

Overall, after assessing the budget and economy according to the current baseline, the CBO reported that the unemployment rate would stay above 8 percent for the remainder of this year.  The unemployment rate currently stands at 8.3 percent.

The agency also said the economy would continue to recover at a “modest pace” in the remaining months of 2012, clocking a GDP growth rate of 2-1/4 percent for the second half of the year.

Widely referred to as the “fiscal cliff,” the expiration of the Bush tax cuts and over $1 trillion in automatic defense and discretionary cuts as a result of last year’s failed budget deal are set to take effect in January 2013.

CBO reported in May that reaching the fiscal cliff will dampen economic growth in the short term, but the “increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013.”

CBO said “reducing that fiscal restraint,” – in other words, implementing the alternative scenario -- would help economic growth in 2013. However, “adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run.”

If no action is taken by Congress, current CBO projections show that unemployment will not return to pre-recession levels until 2017.

Baseline predictions dictate that the rate will decline to 8.4 percent in the fourth quarter of 2014 and to 5.7 percent by the fourth quarter of 2017.

“By late 2022, the unemployment rate declines to 5.3 percent,” CBO said.

But even if the fiscal cliff is avoided, the alternative scenario shows unemployment not dropping below 8 percent until 2014.

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