A PERMANENT extension of the tax cuts enacted under George W Bush would boost growth in the short term but add more than $3,200 billion to the US budget deficit over the next decade, the Congressional Budget Office estimated yesterday, issuing its latest warning on the fiscal outlook.
Doug Elmendorf, the budget office director, said that allowing the tax cuts to continue for all Americans would lead to stronger economic growth and lower unemployment in the coming years, but would darken the fiscal picture significantly by 2020.
“The extra borrowing – and it is a good deal of extra borrowing – would have negative consequences for the economy,” said Mr Elmendorf, who leads the non-partisan agency that analyses the fiscal effect of legislation.
The CBO’s conclusions will be a blow to Republicans – and some members of the business community – who insist that extending the tax cuts will not undermine efforts to tackle the fiscal outlook, since the extra income will foster a virtuous cycle of economic growth and employment.
The Obama administration and many Democrats have proposed extending the tax cuts for Americans earning up to $250,000 a year, but not for wealthier individuals, partly on the grounds that this would help shrink the deficit.
The issue is emerging as one of the biggest flashpoints heading into the November mid-term elections.
The CBO’s analysis of the budgetary impact of extending the Bush tax cuts came as it issued its latest warning on America’s fiscal outlook, saying the US faced “daunting” challenges to rebalance its finances.
Even as it trimmed its forecast for this year’s deficit to $1,342 billion, or 9.1 per cent of GDP, the agency said: “Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or a combination of both.”
The agency also updated its economic forecast, which now has real GDP expanding at a rate of 2.8 per cent in 2010, followed by slower growth of 2 per cent next year. The average unemployment rate this year will be 9.5 per cent, falling to 9 per cent in 2011, the CBO estimates.
The report was released as economic data continued to sour, adding to fears of another slowdown in the recovery. The number of people filing for jobless claims last week rose to a nine-month high of 500,000, the labour department said, while manufacturing activity in the mid-Atlantic region shrank to its lowest level in a year, according to the Federal Reserve Bank of Philadelphia.
Speaking at the White House, US president Barack Obama urged Congress to approve a Bill intended to boost credit to small businesses. – (Copyright The Financial Times Limited 2010)
