News Column

Fiscal Tightening Drags on Growth: CBO

February 12, 2013

Isaac Cohen -- HispanicBusiness

Money and dice

There is agreement that the federal spending cuts, scheduled for March 1, will hurt the slow recovery of the U.S. economy. The bipartisan Congressional Budget Office projects that economic growth will remain slow throughout this year as a result of the approved measures of fiscal tightening, including increases in the Social Security payroll tax and in the income tax of the most affluent.

Additionally, on March 1, the scheduled automatic reductions in federal spending, in both defense and social programs, will contribute to push economic growth this year down to 1.4 percent. As a consequence, the projection is that unemployment will remain above 7 percent until 2014. This means six consecutive years of unemployment above 7 percent, which according to the CBO is the "longest period of such high unemployment of the last 70 years."

As a result of fiscal policy tightening, last year, U.S. economic growth slowed down to 1.5 percent. According to the latest figures released by the Department of Commerce, U.S. economic growth in the last quarter of 2012 was negative 0.1 percent. In large measure, this was due to a 22.2 percent fall in defense spending and a 5.7 percent reduction in exports.

The CBO estimates that imminent automatic cuts in federal spending will reduce economic growth this year by 1.25 percent. This is equivalent to implementing budget reductions with an ax.

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Isaac Cohen is an international analyst and consultant, a commentator on economic and financial issues for CNN en Espaņol TV and radio, and a former director, UNECLAC Washington Office.


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