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Former Obama Aide Orszag: Tax Deal Unlikely by Year’s End

Thursday, 03 May 2012 11:19 AM

The White House and Congress won't likely agree to extend tax cuts and put off spending cuts this election year, which could end up siphoning money out of the economy and slow growth in 2013, says former White House budget director Peter Orszag.

By the end of the year, the Bush tax cuts, a payroll tax holiday, and extended unemployment benefits are set to expire, other taxes are set to rise, while automatic spending cuts are set to kick in, a combination dubbed a fiscal cliff due to the sudden impact it could have on the economy.

Furthermore, tax hikes and spending cuts will kick in just after the election, when a lame-duck Congress and a potential lame-duck White House will preside over the country.

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"Under pretty much any scenario the probability of a deal being done during the lame-duck is pretty low, much lower than people think," Orszag tells CNBC. He is the former head of President Barack Obama's Office of Management and Budget and current vice chairman of global banking for Citigroup.

"If (Republican Mitt) Romney wins, the House in particular will logically say, 'Let's wait until President Romney is in office and we'll clean things up after the fact.' If President Obama is re-elected, there may be an attempt to get a framework agreement done during the lame duck, but I don't see how that — it may happen, but it's going to be more challenging than people think."

Various estimates see the fiscal cliff sucking $500 billion out of the economy, which could offset economic growth and potentially send the U.S. back into a recession.

Federal Reserve Chairman Ben Bernanke has said monetary authorities can't do much to help address the pending shock.

"We'll have to take fiscal policy into account to some extent," Bernanke said recently at a press conference, according to the Christian Science Monitor.

"I think it's very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there's I think absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy."

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