CHART: How Deficit Cuts Are About To Hurt The Economy

January 31, 2012 8:08 am

The U.S. economy will suffer over the next few years as a result of fiscal austerity measures including the recent spate of spending cuts, according to the Congressional Budget Office’s latest forecast issued Tuesday.

Economic growth and the employment rate will be reduced for many years to come as a result of the August debt limit law’s steep $2.4 trillion in spending cuts and expiration of expiring tax provisions including the Bush-era tax cuts, the budget office report concluded.

To illustrate this point, CBO made separate projections pegged to two baselines — current law, in which the spending cuts and tax increases go into effect, and an alternative fiscal scenario in which these fiscal policy changes are voided.

Without the austerity measures, deficits are higher, but real GDP growth is projected to be as much as 0.8 percent higher this year and up to 2.9 percent higher next year, when the debt limit law’s sequestration cuts kick in and the Bush-era tax breaks expire. The baselines even out after a decade but the near term hit to the economy is salient.

Under current law, real GDP is projected to grow by 2.0 percent this year and just 1.1 percent next year, CBO said. The unemployment rate (per fourth quarter percentage) is expected to rise to 8.9 percent in 2012 and 9.2 percent in 2013 — the figure is expected to stay above 7 percent until 2015.

The findings reflect the irony of Washington’s laser-like focus on the deficit in recent years, which has led to various budget-tightening measures that have held back rather than helped the economy. And if the remainder of the contractionary fiscal policies go into effect, that trend appears set to continue.

CBO explained the consequences of spending cuts, a focal point of legislation last year.

“Spending resulting from the American Recovery and Reinvestment Act and outlays for unemployment compensation and other benefits that tend to increase during economic downturns will continue to ebb over the next few years,” CBO said. “Caps on discretionary spending and other procedures established in the recently enacted Budget Control Act also will hold down growth in federal spending.”

In the nearer term CBO projected, as have many economists, that failing to extend the payroll tax cut and unemployment insurance would be an immediate hit to the economy. They expire in one month.

Image from Sergey Mironov/ Shutterstock

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