WASHINGTON, Feb 7 (Reuters) - Failure to extend a payroll tax cut and unemployment benefits would be a significant drag on the U.S. economy, Moody’s Analytics chief economist Mark Zandi told Congress on Tuesday.
U.S. lawmakers from both parties are working on a deal to extend emergency jobless benefits, and the payroll break for 160 million Americans beyond late February.
If they fail, the payroll tax, which funds the federal Social Security retirement program, will revert to 6.2 percent from 4.2 percent and leave workers with an average of about $1,000 less in their wallets this year, and many without jobs will be cut off from unemployment benefits.
“Not extending these programs would deliver a significant blow to the still-tentative economy,” Zandi told the congressional Joint Economic Committee.
Zandi said not renewing the payroll holiday would cut economic growth by 0.4 percentage point this year and not extending emergency jobless benefits would hit growth by 0.3 percentage point.
Moody’s now estimates real Gross Domestic Product growth at 2.6 percent in 2012, assuming the policies are extended.
Zandi, who has advised both Democrats and Republicans, also said failure to act would raise the unemployment rate by at least 0.3 percentage point in 2012. The jobless rate fell to a near three-year low of 8.3 percent in January.
“The recovery could easily be derailed,” he said.
Democrats and President Barack Obama have been pushing the extensions, and most Republicans are eager to get the issues behind them after a bruising battle at the end of last year, where they were in the awkward position of arguing against tax cuts.
Disagreements over how to pay for the tax break hampered lawmakers’ efforts to extend it until the end of 2012.
Zandi also said the extension of the payroll tax cuts and jobless benefits late last year helped prevent the United States from veering back into a recession. (Reporting By Kim Dixon; Editing by Eric Beech.