Little economic impact from US debt deal: analysts

The new deal to slash the US deficit and raise the borrowing ceiling will not have much immediate effect on the economy © AFP/Getty Images Mark Wilson

AFP

WASHINGTON (AFP) – Spending cuts in the new deal to slash the US deficit and raise the borrowing ceiling will not have much immediate effect on the economy — or the deficit itself, analysts said Monday.

Heralded as a political success that averts the United States being forced to default on its debt, the deal is supposed to cut the country’s gaping deficit by $900 billion over 10 years — or $2.4 trillion, if a second-stage effort works out.

But for fiscal 2012, beginning in October, only $21 billion will be cut from expected spending of up to $3.7 trillion, and only $41 billion the following year.

“The so-called ‘immediate’ spending cuts of $917 billion do of course not begin this year. And they barely have an impact in 2012 or 2013 either,” said Harm Bandholz on UniCredit Bank.

“In a $15 trillion economy, the impact… is negligible,” said John Ryding of RDQ Economics.

Fears were that an effort by hardline Republicans to radically pare the country’s budget shortfall and accumulated debt could force the near-stalled US economy back into recession.

Instead, though, what significant reductions there was will only come later in the 10-year outlook — hitting $100 billion a year in 2017 and rising from there.

The deal was struck in 11th hour talks Sunday as the August 2 deadline to raise the country’s $14.3 trillion debt ceiling loomed — with the possibility of defaulting on its debt, or shutting down much of government, the outcome if the talks failed.

“The real meaning (of the deal) is only that we don’t have a debt ceiling fiasco in the next few weeks,” said Ryding.

“The two things that needed to be done… to have a broad-based tax reform (and) to reform the entitlement programs, they weren’t touched as part of this deal,” he said.

But any tightening of spending, economists warned, spelled trouble for the economy, which virtually stagnated in the first half of the year, growing at roughly a one percent annualized pace.

With government spending a key economic driver, possible cuts could have forced more layoffs in both the public and private sectors, pressing the 9.2 percent unemployment rate higher.

“Although the impact of these cuts of the next couple of years is likely to be small, there’s a more direct relationship between spending and jobs than there is between taxes and jobs,” said Henry Blodget of Business Insider, a website of economic and market analysis.

“The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further,” wrote Paul Krugman, New York Times columnist and Nobel economics laureate.

Alex Brill of the conservative American Enterprise Institute said that just removing the uncertainty over increasing the debt ceiling might help the turgid economy.

The political battle “may have been a drag on the over the last few weeks or months,” he told AFP.
“But I think that having a resolution to this problem is likely to be a boost for the economy.”

At the same time, the deal, many worried, did not go far enough for the country to avoid a historic cut in the country’s top AAA debt rating of more than nine decades.

Standard & Poor’s had warned in April, and repeated the warning two weeks ago, that Washington needed a “credible” long-term strategy to reduce the deficit to avoid the downgrade, which could push up US borrowing costs, further hurting the economy.

S&P last week said that a $4 trillion reduction plan over 10 years would be credible. At the most optimistic interpretation, the plan the two sides have tentatively agreed achieves about $3 trillion in savings.

“It will save the US government from defaulting on its obligations to pensioners and others. But it does not address the long-term fiscal challenges facing the nation,” Sebastian Mallaby of the Council on Foreign Relations said of the deal.

© AFP — Published at Activist Post with license