The American economy will be resilient to tax hikes and government spending restraint, according to a report released by TD Economics.
“Job growth is strengthening, housing is rebounding and equity markets have reached new highs,” says TD chief economist Craig Alexander. “If it weren’t for tax hikes and spending cuts, the economy would be well on its way to 3% to 4% growth.”
Instead, TD Economics forecasts the economy will grow 1.9% in 2013, below the 2.2% average pace of growth seen in the first three years of economic recovery since the Great Recession. Economic activity should accelerate as the year goes on, with 2014 chalking up sturdier growth of 2.8%.
Back in December, the key risk to the economic forecast was the fiscal cliff. Fortunately, Congress reached a deal in January to avoid the majority of the cliff by making permanent the Bush-era tax rates on income lower than $450,000.
“Decision makers still left enough fiscal drag to bite,” notes Alexander. “Congress did not extend the payroll tax holiday resulting in a $700 tax increase on the average household; and on March 1, they allowed automatic spending cuts also known as sequestration to kick in.”
Sequestration represents the cancellation of $85 billion in government spending authority and will require defense agencies to trim their budgets by 8% and non-defense agencies by 5% over the next six months. TD Economics estimates this will cut 0.6 percentage points from economic growth in 2013.
Beyond the tax hikes and spending cuts already enacted, other fiscal risks remain. Congress has yet to agree on a budget and is fast approaching a March 27 deadline to avoid a shutdown of non-essential government services. In May, the U.S. government will again approach the statutory debt ceiling, requiring politicians to once again work together to avoid threatening the recovery.
“We take heart in the fact that compromises have been occurring, but must also recognize that policy gridlock will remain a key downside risk to the economic outlook,” said Alexander.
To read complete findings of the TD Economics click here.