Payroll tax blip will not bust economy: analysts

WASHINGTON Tue Dec 20, 2011 6:14pm EST

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WASHINGTON (Reuters) - If Congress misses its New Year's Eve deadline to renew a payroll tax cut and jobless benefits by a few weeks or a month, damage to the economy could be reversed in fairly short order, economists and analysts say.

As the odds of a missed deadline rise, several economists said the economy could survive nearly unscathed if there is a short delay in extending the payroll tax break for 160 million workers and unemployment insurance for millions.

"If it is a week or two, it is annoying but the impact would be fairly small," said Nigel Gault, U.S. economist at economic forecasting firm Global Insight.

Chances of a delay increased on Tuesday when the Republican-led House of Representatives rejected a bipartisan Senate bill that would have extended the tax cut and jobless aid for two months. The House vote deepened the deadlock on the issue.

Economists have estimated a rise in the payroll tax rate paid by average workers - the result if Congress fails to act - could cut projected economic growth in half next year.

At least one prominent economist, Mark Zandi at Moody's Analytics, has said it could bring the economy to the brink of another recession. But a short-term lapse, with renewal of the tax cut following closely behind, is feasible and has precedent, in particular for extending jobless benefits.

"The upshot is that if reinstated by mid-January, the effects on disposable income from a lapse in the payroll tax cut ... could be mostly reversed before the end of the month," Goldman Sachs economist Jan Hatzius wrote in a note on Monday.

Both sides in Congress are holding firm, with 11 days and two major holidays to go before the policies expire.

A cut of 2 percentage points in the payroll tax, which funds the old-age Social Security program, passed with bipartisan backing last year, in a bid by President Barack Obama to jumpstart the economy. Obama has since proposed an extension and expansion of the program but Republicans have balked.

The hardest hit by a deadline will be those nearing the end of unemployment insurance, according to Gault.

"The impact is more immediate on the unemployment insurance side where you have people who are probably spending what they are getting, so if they don't receive their payments they will have to cut their spending," Gault said.

The Department of Labor projects that if Congress fails to extend jobless benefits, nearly 700,000 people will lose them by the second week of January and nearly 2.2 million will lose them by the middle of February.

"We don't think it will be passed by the end of the year," Tom Porcelli, chief U.S. economist at RBC Capital Markets, said on Monday on a conference call.

"An interesting thing could happen if it is not passed this year. Instead, if it comes back to life early in the year in January or February, and they decide to pass it and make it retroactive, then all of a sudden you could have a pretty sizeable boost to consumption in the first quarter of the year."

(Additional reporting by Chris Reese)

(Reporting By Kim Dixon; Editing by Kevin Drawbaugh and John O'Callaghan)

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