Lawmakers will find a way to steer the economy away from a quickly approaching one-two punch of tax hikes and deep government spending cuts due to strike at the end of the year, said Goldman Sachs CEO Lloyd Blankfein.
At the end of 2012, the Bush-era tax cuts and other tax breaks are set to expire at the same time automatic government spending cuts designed during the 2011 debt-ceiling deal kick in, a combination known as a fiscal cliff that could send the country into a recession next year.
The nonpartisan Congressional Budget Official has said failure to address the fiscal cliff could send the economy contracting by 0.5 percent next year alone.
Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans
Lawmakers have been unwilling to address tax and spending reforms in an election year, though some have suggested they can convene after elections and even in early 2013 and tackle the issue then, even with stopgap measures.
Expect a compromise, Blankfein told CNBC, as lawmakers are fully aware of the consequence of letting political differences getting in the way of avoiding disaster, and so will the next president, be it incumbent Barack Obama or his GOP challenger, Mitt Romney.
“Whatever the outcome, the country’s looking at this election as a referendum,” Blankfein told the network.
“Whoever wins the election, I think there will have to be a compromise. The other side is not going to go into a funk.”
Both sides will suffer if a deal fails to materialize and the economy contracts anew.
“It won’t be a winner-take-all, because at the end of the day they have to bring the other 49 percent — or, heck, the loser may have 51 percent of the popular vote — they have to bring that along and that will make the outcome and compromise more stable in the long run,” Blankfein said.
A recent CNNMoney survey of economists finds that most believe Congress will save the day.
The survey of 17 economists found that 14 believe the end of tax breaks and the arrival of federal spending cuts would throw the economy into recession, with 12 pointing to the fiscal cliff as the most serious risk facing the economy.
“Should gridlock prevail, business sector investment and hiring will be stymied, and the household sector will sharply curtail spending,” said Patrick O’Keefe, director of economic research for accounting firm JH Cohn, CNNMoney added.
However, all 17 economists agreed the economy will avoid the fiscal cliff, pointing out that Democrats and Republicans will agree on a way to extend tax breaks and prevent the spending cuts either during the lame duck session of Congress or early in the new year.
“The politics of disagreement is not good,” said Maury Harris, chief U.S. economist for UBS.
A Tax Policy Center study finds that failure to do anything at all about the fiscal cliff could send income, payroll and other taxes rising for 90 percent of all Americans.
“Lawmakers could soften that near-term hit by delaying or repealing provisions in the ‘cliff’ or by enacting other spending and tax policies that would provide offsetting support for the economy,” the study stated.
Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans
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