A wave of tax increases and billions of dollars in automatic spending cuts would cause "a lot of damage" to the fragile economy, Treasury Secretary Timothy Geithner said on Monday.
Tax breaks for all Americans are set to expire at the end of the year, and $100 billion in cuts to domestic and military programs are set to take effect in January if Congress does not agree on a new deficit-cutting deal.
"Many people who look at this say that, yes, you'd at least get a recession out of this," Geithner said on PBS' Charlie Rose television show. "The cumulative size of those cuts - tax increases and spending cuts - are very, very large relative to the economy," he said.
The nonpartisan Congressional Budget Office forecasts that the mix of spending cuts and tax hikes would cause the U.S. economy to contract at an annual rate of 1.3 percent for the first half of 2013 if lawmakers do not act.
The White House is pushing Congress to extend for one year tax cuts for families earning less than $250,000 a year. Taxes for those earning more than that would increase in 2013 if Congress passes legislation the Obama administration wants.
Republicans argue that all tax cuts should be extended to avoid hurting the tepid economy.
Geithner warned lawmakers that investors could not stomach a repeat of last year's debt ceiling battle that increased the U.S. Treasury's borrowing costs and stripped the United States of its top credit rating.
"You saw huge damage to consumer confidence, to business confidence, and to confidence around the world in the United States because you had people in public office threatening to default on our nation's obligations," Geithner said.
President Barack Obama said on Monday that Congress "ought to be able to come together and agree on a plan, a balanced approach" to avoid the steep automatic spending cuts.
EURO ZONE WILL STAY INTACT-GEITHNER
Geithner reiterated that the domestic fiscal problems and the European Union's economic crisis were still the biggest threats to the U.S. economy.
But he said he thought the 17-nation common currency euro zone would stay intact. "They've said, 'We will do everything it takes to hold the European Union together.' And you could say that's what they're trying to do," Geithner said.
His comments came as Moody's Investors Service cited an increased chance that Greece could leave the euro zone, which would set off a chain of financial sector shocks.
Although Geithner said European leaders had committed to do what it takes to hold their financial system together, he added they had to make that commitment credible to markets and investors.
"If you leave Europe on the edge of the abyss, if you leave it just teetering on the edge of financial disaster, it'll be much harder for this strategy to work," he said.