According to the Organization for Economic Cooperation and Development (OECD), a severe fiscal contraction in 2013 could disrupt the U.S. economic recovery. It is urging the U.S. government to move steadily to tighten its budget.
An upsurge in U.S. spending cuts and tax increases known as the "fiscal cliff" will take place in January if politicians fail to agree on how to try and delay some of these actions.
The Bush-era tax cuts and jobless benefits for those that have been unemployed for a long period of time are expected to expire. Furthermore, another $1.2 trillion in "across-the-board" reductions in spending on federal programs will be implemented due to Congress' inability last year to agree on a deal to slash the budget deficit. As a result, the OECD said these activities would reverse fiscal policy regardless of the fragile state of the U.S. economy.
The OECD commented that "The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery." However, it did not reveal what the effect would be on U.S. GDP if all the tax cuts failed and all the scheduled spending cuts took place consistently.
Economists on Wall Street have also predicted that fiscal policy could be constricted by about $600 billion next year if legislators do not come to an agreement. On the other hand, several economists believe that lawmakers will figure out a way to control the situation.
The OECD predicts that the U.S. economy will increase 2.4 percent in 2012 and 2.6 percent in 2013. However, these estimations are presupposing that the budget deficit will be slashed by 1 percent and 1-1/2 percent of GDP by 2013.
The United States has run budget deficits topping $1 trillion for three straight years, and it is on course to do so for a fourth.
The OECD has emphasized that "This smoother and more gradual pace of consolidation would greatly reduce the risks of derailing the recovery, at little cost to longer-term fiscal sustainability."
The OECD also explained that lawmakers could decrease the deficit by limiting mortgage interest deductions for tax purposes and credits for health insurance. These actions could lower distortions in the market and reduce income inequality.
A far as U.S. unemployment rate in 2012, the OECD has predicted that it will average about 8.1 percent. However, it does anticipate that the rate will fall to 7.6 percent in 2013. The OECD also cautioned that a high level of continuously long-term unemployment increased the possibility that joblessness could become more difficult to reduce.
The OECD did admit that "the recent momentum in hiring activity may presage a faster recovery of the labor market than projected, which in turn would foster a quicker normalization in economic activity."
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