House spending cuts hurt U.S growth -Goldman Sachs

WASHINGTON Wed Feb 23, 2011 4:50pm EST

WASHINGTON Feb 23 (Reuters) - A $61.5 billion spending-cut bill passed by the U.S. House of Representatives on Saturday would slow economic growth significantly this year, according to an analysis by the global investment firm Goldman Sachs (GS.N).

"Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law," according to Alec Phillips, who signed the analysis that is dated Tuesday.

Democrats, who want to maintain spending this year at around current levels, seized on the Goldman Sachs analysis.

"This nonpartisan study proves that the House Republicans' proposal is a recipe for a double-dip recession," said Senator Charles Schumer, a member of the Senate's Democratic leadership.

Republicans in Congress, especially conservative Tea Party activists who were elected in November, have touted their fiscal 2011 spending-cut bill and upcoming attempts to impose more U.S. budget cuts as the key to improving the economy and creating jobs.

Democrats have countered that while there is a need to cut government spending and budget deficits over the long-term, policy-makers must tread softly in the short-term so the fragile economic recovery underway is not cut short.

Commenting on the Goldman Sachs estimate of impact on Gross Domestic Product, Michael Steel, a spokesman for House Speaker John Boehner said: "This is the same outdated Washington mind-set that led to claims that the trillion-dollar 'stimulus' would keep unemployment below 8 percent." He added, "We don't need more ineffective 'stimulus' spending; we need to get our economy growing again and help the private sector create jobs."

EARLIER BUDGET FORECASTS

The U.S. jobless rate is at 9 percent.

The Goldman Sachs analysis said that the more modest spending cuts it had been assuming in earlier budget forecasts would result in a "drag on growth" in the second quarter of as much as 1 percentage point. That drag would quickly fade over the following two quarters "as spending stabilizes at a lower level, with little effect versus current policy on the rate of real GDP growth by year end."

With Democrats and Republicans facing a March 4 deadline to reach some sort of deal on funding the federal government, there are worries that a failure would lead to a temporary shutdown of many government offices and programs if there is no deal.

The Goldman Sachs analysis points out that a government shutdown "poses less risk" than proposed spending cuts "as long as it is brief."

But a shutdown lasting more than a week could result in around $8 billion per week in missed federal spending, with a resultant drag on growth, the analysis said. "Pulling this spending out of Q2 would reduce the contribution to quarterly GDP growth from federal activity by a little over 0.8pp at an annualized rate for each week the shutdown lasted," it added.

In its fiscal 2012 budget proposal released last week, the the Obama administration forecasted 2011 economic growth of 2.7 percent year over year, while Blue Chip economists estimate 3.1 percent. (Reporting by Richard Cowan; editing by Philip Barbara)

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Comments (2)
TeflonPalin wrote:
The media tried for months to pin down the tea party on what would be cut, where, HOW?? Across the board it was the same “$100 Billion” and “we’ll look at everything”. What they forgot to look at was the effect cuts would have on the economy. From governor’s mansions to DC we are starting to see the same ol’ GOP going after the working class and poor, and the two are starting to become one and the same.

Feb 23, 2011 6:37pm EST  --  Report as abuse
Goldman says budget cuts would cut growth? Sounds good but now getting worried about these findings.. Just curious: Is Goldman shorting the municipal bond market? Err, I mean market making..

Feb 28, 2011 1:16pm EST  --  Report as abuse
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