Senate Budget Pact Would Crimp, Not Crush, U.S. Economic Growth

(Bloomberg) The budget deal struck by the White House and Senate Republican leaders, if it becomes law, probably would slow the U.S. economic recovery without stopping it.

The elimination of a 2 percent payroll tax cut, coupled with higher income taxes on the wealthy, will help reduce growth in the first quarter to 1 percent, from 3.1 percent in 2012’s third quarter, the latest data available, according to economists at JPMorgan Chase & Co. and Bank of America Corp. The expansion will strengthen later in the year as the housing market continues to rebound, they forecast.

“It’s going to definitely present a headwind for the economy,” Michael Feroli, chief U.S. economist for JPMorgan Chase in New York, said of the fiscal pact that the Senate planned to vote on early today. “We’re looking for a downdraft in growth in the first half of the year, with the economy coming back in the second.”

The first half slowdown will mean that the U.S. will make limited progress in reducing unemployment in 2013, according to projections by Ethan Harris, co-head of global economic research for Bank of America in New York. He sees the jobless rate falling to 7.5 percent in the fourth quarter of 2013 from 7.7 percent in November 2012.

The agreement forged in talks between Vice President Joe Biden and Senate Minority Leader Mitch McConnell, a Kentucky Republican, would avert some, though not all, of more than $600 billion in automatic tax increases and spending cuts slated to take effect this year. Under the accord, households making less than $450,000 per year would be spared an income tax rate increase. And the unemployed would still be eligible for extended jobless benefits.


Payroll taxes would rise, to 6.2 percent from 4.2 percent last year. And the wealthy would see an increase in their top income tax rate, to 39.6 percent, from 35 percent.

The deal faces an uncertain fate in the Republican- controlled House of Representatives. House Speaker John Boehner of Ohio said last night he would bring any budget legislation passed by the Senate to the House floor.

Even if the measure is passed by the House, the agreement won’t mean the end of budget brinksmanship, Andrew Laperriere, senior managing director for ISI Group in Washington, said in a report yesterday to clients.

The U.S. has hit its $16.4 trillion debt limit, forcing the Treasury Department to take what it called “extraordinary measures” to keep funding the government for now.

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