Tags: Fiscal | cliff | survey | economists

USA Today Survey: Fiscal Impasses Blocking Return to Robust Growth

Monday, 13 Aug 2012 08:36 AM

Budgetary impasses are blocking a return to growth, and economists have little faith legislators will work to steer the country away from an inbound fiscal adjustment that will strike at the end of this year, a USA Today survey of economists finds.

At the end of the year, tax breaks including the Bush-era tax cuts expire at the same time automatic cuts to fiscal spending kick in, a combination known as a fiscal cliff that could send the country sliding back into recession if Congress fails to act.

Some estimates see the fiscal cliff siphoning over $500 billion out of the economy next year alone, and the USA Today survey of 50 economists finds that most have little faith lawmakers will tackle the problem head on.

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"Fifty-three percent of those surveyed don't think Congress will be able to lessen the impact of $560 billion in tax increases and spending cuts, slated to take effect at year's end, in a way that avoids significant damage to the economy," USA Today reported.

"The Congressional Budget Office says the so-called fiscal cliff would slice up to 4 percentage points off growth next year — causing the economy to contract in the first half — if all the deficit-slicing measures occur at once."

The CBO has said that failure to steer the U.S. away from the fiscal cliff today could throw the country into a recession next year, with gross domestic product shrinking 1.3 percent in the first half if Congress does nothing.

"Given the pattern of past recessions ... such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO said in a recent report, according to The Associated Press.

USA Today economists said that fears surrounding the fiscal cliff alone have been prompting businesses to put projects on hold, which has cut into hiring and kept recovery tepid.

"I think the politics have become so heightened and emotional that we're at as great an impasse as I've ever seen," said economist Tom Binnings of Summit Economics, USA Today added.

Survey participants, meanwhile, forecast the economy to grow 2.1 percent next year, down from a 2.6 percent median estimate made in April, and the unemployment rate to drop to 8.1 percent by the end of this year from today's current rate of 8.3 percent.

Some 58 percent expect the Federal Reserve to intervene and buy more Treasury bonds held by banks this year to keep long-term interest rates low and spur recovery, a monetary policy tool known as quantitative easing that weakens the dollar and sends stocks rising as side effects.

In addition, 72 percent of those surveyed are less optimistic about the economy for the rest of the year than they were three months ago, while 6 percent are more optimistic.

Legislators, meanwhile, have hinted that they'll likely sidestep addressing the fiscal cliff this year, with few having the stomach to change tax and spending policies in an election year.

However, after elections in November, both Democrats and Republicans could reconvene possibly even in early 2013 and deal with the issue retroactively.

Some noted market experts agree that lawmakers will fail to adequately tackle the fiscal cliff this year, which would be optimal, but have pointed out that even if they do address the problem retroactively and even if brinkmanship damages confidence in the U.S. economy, markets will shrug it off and recover.

"I think the U.S. market should continue to be fairly strong based on growth, which will be modest, about 2 percent. The thing that's out there that's really causing legitimate fear is the fiscal cliff. Sadly, I don't believe anything will be done by Congress or the administration about the fiscal cliff until after the election," said Jim McCaughan, CEO of Principal Global Investors, according to CNBC.

"I don't think the fiscal cliff is as bad a great ogre out there in 2013 as some might say. So I expect the market to still be quite good."

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Monday, 13 Aug 2012 08:36 AM
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