The U.S. economy would enter into recession next year if tax hikes and spending cuts take effect as scheduled in 2013, said the U.S. Congressional Budget Office on Tuesday.

The non-partisan agency estimated that the U.S. economy would contract at an annual rate of 1.3 percent in the first half of 2013 if Congress allow the Bush-era tax cuts to expire and large spending cuts to enact in January.

The economy would return to 2.3 percent expansion later in 2013, and growth rate for the whole year would be merely 0.5 percent.

"Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in the first half of 2013 would probably be judged to be a recession," the CBO said in a report.

The agency noted that policymakers are facing difficult trade- offs in formulating the nation's fiscal policies. "If the fiscal policies currently in place are continued in coming years, the revenues collected by the federal government will fall short of federal spending, putting the budget on an unsustainable path. On the other hand, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion."

It cautioned that eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the long run.

The report, "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013", came as the impending "fiscal cliff", a reference to important fiscal decisions including the expiration of the 2001 and 2003 Bush tax cuts as well as the need to raise the public debt limit again, continued to fuel anxiety.

However, so far lawmakers in both parties have been divided on how to defuse the fiscal bomb. Enditem