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CBO warns of downside risks to growth from spending cuts

Publish Date23/08/2012 01:54:29 PM

Last Update23/08/2012 03:18:39 PM

CBO warns of downside risks to growth from spending cuts

The debt crisis is not just a European matter the United States reminds. The lingering debt debate in the United States is not still over and seemingly the November election will only complicate the path to agreement among policy makers forcing closer the eminent deadline at the end of this year for the automatic spending cuts.

The U.S. Congressional Budget Office (CBO) warned on Wednesday of the dire consequences of reaching this “fiscal cliff” that might push the economy into a “significant recession”.

So far the U.S. Congressional Budget Office sees actually and unfortunately a worse scenario regarding the economic health of the world`s leading economy, and revised lower their expectations form the May projections as the global economic status worsens. The enormous government spending cuts and tax hikes that are due to come in effect automatically next year as a result of successive failures by Congress to agree on some orderly alternative method of reducing budget deficits are forecasted to only make the economic situation worse.

In fact the Congressional Budget Office warned of this incident to occur publicly especially if Washington fails to come up with a solution and this should be taken extremely serious. If that "fiscal cliff" is not avoided as described by the CBO, it will lead most probably to a "significant recession" and also the loss of 2 million jobs.

The CBO projects the economy will contract severely reemitting the case of 1969 when tough fiscal tightening was applied after the Vietnam War. The CBO projects GDP growth to contract 0.5% in 2013 revised lower from the May estimate of 0.5 full year growth.

The CBO in the new projections expects the economy to contract a steep 2.9% in the first half of 2012 and follow with gradual and weak recovery in the second half with 1.9% growth. The revisions are to the downside from the previous estimates of 1.3% contraction and 2.3% growth respectively.

Congressional Budget Office director Doug Elmendorf added that the economy is already being "held back" and many businesses accordingly are avoiding new investments and hiring decisions; not forgetting the unending downside pressures caused by the recent global economic slowdown and mainly the endless debt crisis resigning on the EU soil which is the main pressure on the economy and reason for the downside revisions.

The expectations for a decision before the November election is very slim, and there is little hope the Congress can reach an agreement shortly after the new government is announced before the looming December 31,2012 deadline, which leaves the decision a matter of debate and highly needed as soon as possible before we further approach the election.

Romny campaign spokeswoman Amanda Henneberg added that "another indictment of President Obama`s economic policies that have resulted in overspending, increasing debt and a growing financial burden on the next generation." The “fiscal cliff” is now a key political card and the CBO in this report is warning against politicians taking it lightly and gambling with the economic future indeed!

The automatic spending cuts, or as now referred to as the “fiscal cliff” are the automatic spending cuts and the end of $500 billion tax breaks that come into effect with the end of this year as the Congress failed to reach an agreement on a plan to reduce the deficit.

The CBO projected that for the current fiscal year that ends on September 30 the deficit is expected at $1.28 trillion slightly revised lower from the previous estimate of $1.171 trillion. This is good news for the Treasury that has a bit more room to avoid reaching its debt limit where the $16.4 trillion debt ceiling might still be reached by the end of the year and need to be raised.

U.S. politics is now the game and not the economy as it only turned to a winning election ballot for Presidential Candidates. The market now closely eyes the next update on September 06 where the White House will release the proposed Obama administration plans to concentrate the spending cuts shall they come into effect where half of the $109 billion of cuts for 2013 is expected to be shouldered by the military and domestic programs.  

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