With next week's deadline to avoid $85 billion in automatic budget cuts nearing, economists say hopes are fading for a "grand bargain" on long-term deficit reduction -- even though many say it would boost the economy next year.
In a USA TODAY survey of top economists, 64% say a deal that would close tax loopholes, change policies such as the way Social Security benefits are adjusted for inflation, and curtail Medicare and Medicaid spending growth would help the economy "some" or "a lot" in 2014. But 42% say they are less optimistic than they were three months ago that such a deal will happen.
"If it included legitimate cuts (in entitlement spending), it could add a percentage point or two to growth," said Mike Englund, chief economist at Action Economics. "If the grand bargain isn't too grand -- and halfway between the two sides isn't -- then it probably will have little observable effect."
The best thing a deal would do for 2014's outlook is stave off the automatic spending cuts, half of which would come from defense programs, said Richard Moody, chief economist at Regions Financial. The effect on 2014 would be less than the impact of such a deal on this year, since it would head off spending cuts that would lead quickly to layoffs, he said.
"We don't have a deficit problem now, but we sure have one eight to 10 years from now," Moody said.
A deal that convinces executives that fiscal policy will be more stable in the future, after four years of trillion-dollar deficits, is likely to boost business investment, said Diane Swonk, chief economist at Mesirow Financial. Most economists prefer a deal that eases up on short-term cuts but trims entitlement programs later in the decade, Swonk said.
President Obama said Tuesday that automatic cuts would force layoffs of everyone from local teachers to FBI agents.
The budget cuts scheduled to start March 1 are likely to happen, since Congress is in recess this week, but they likely won't last long before public pressure makes officials pass a stop-gap budget bill, said Nigel Gault, chief U.S. economist at IHS Global Insight.
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