US cliff deal to slow growth

The political deal to pull the US away from the "fiscal cliff" will hit economic growth and efforts to generate jobs, economists said Wednesday, but the country will avoid a feared recession. Although not as severe as they could have been, tax increases on the country's wealthiest two per cent and higher paycheck deductions for all workers agreed by political leaders will suck enough money out of the economy to significantly hold back growth in 2013, they said. Moreover, politicians still face a battle over cutting federal spending -- put off for two months in the wrangling over the cliff deal finally passed Tuesday -- that could further crunch the economy this year. That means more tepid expansion of gross domestic product this year, with equally slow job creation as in 2012, by most estimates. "We are looking at growth of 1.7 per cent, somewhere around there," after around 2.0 per cent GDP growth in 2012, said Gregory Daco of IHS Global Insight. But that is better than what could have been if Democrats and Republicans had failed to agree on legislation to avoid the much larger programmed tax hikes of the cliff, he said. "If nothing had happened... we would have been in a recession." The biggest impact will be an increase in how much employees see deducted from their paychecks for social security: after having been cut to stimulate growth in recent years, the rate goes back to 6.2 per cent from 4.2 per cent. Daco estimated that will pull US$113 billion out of the economy -- money that mostly would have otherwise been spent on goods and services. "That is the measure that is going to hit the most people," he told AFP -- by itself cutting 0.4 per cent from potential growth. An increase in tax rates for Americans earning over US$400,000, to 39.6 per cent from 35 per cent, will not have as large an impact, he said: "A dollar for them is not the same as a dollar for someone earning US$50,000." Economist Mark Zandi of Moody's Analytics said the tax increases and spending cuts still to be agreed will take about one percentage point from what growth could have been, had the 2012 tax rates and spending plans stayed in place. "The result is that the US economy will grow just over 2 per cent in 2013, about the same as in 2012," Zandi said. In addition, he added, it will hold back job creation, "with 700,000 fewer net new jobs created and an unemployment rate about half a percentage point higher than it would have been if last year's policy had simply been extended." Gregory Michael of BMO Capital Markets said the impact would be larger -- cutting 1.4 per cent from potential GDP growth. "Nearly half of this restraint reflects the increase in payroll taxes, one third represents the delayed automatic spending cuts and the remainder reflects all other measures including higher tax rates for those making more than US$400,000." Economists said that despite the deal on tax hikes, the looming political fight over short- and long-term spending reduction will continue to worry businesses, which could continue to hold off on investment and hiring as they did in 2012. "There's still a lot of uncertainty in the economy," said Daco. "Businesses are not yet in the full-confidence mode." Many are worried there will be a repeat of the mid-2011 fight in which Republicans tied raising the crucial government statutory borrowing ceiling to slicing spending. The country again struck its debt ceiling on December 31, and can get by via accounting measures for two months before it must be raised -- the same timeframe the government has now to find a way around sharp programmed spending cuts known as the sequester. President Barack Obama has repeatedly warned opposition Republicans not to tie the two together in upcoming negotiations. The International Monetary Fund on Wednesday criticised the cliff deal as too limited to truly address the country's problems. "More remains to be done to put US public finances back on a sustainable path without harming the still fragile recovery," IMF spokesman Gerry Rice said. He urged a comprehensive long-term deficit reduction plan, and added that "it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills."