US budget impasse holding back economy: survey

That consensus emerges from the latest Associated Press Economy Survey just as the budget impasse in Washington is about to trigger automatic spending cuts across the economy.

Many of the economists think consumer spending has slowed in response to higher tax burdens but will rebound later in the year. By contrast, they worry that the budget fights in Washington will persist for much of 2013 and drag on economic growth.

Twenty-three of the 37 economists who responded to the survey last week say the paralysis in Washington is a significant factor in slowing the economy. The next-biggest factors they cite, in order: too little job growth, excessive government regulation and taxes, stagnant wages and cautious bank lending. Only eight say they worry about consumers saving more and spending less.

The budget impasse that will set off US$85 billion in spending cuts starting Friday will shave an estimated half-percentage point from economic growth this year.

It will be followed by other key deadlines: Much of the government will shut down March 27 without new legislation to authorize spending. Congress must also agree to raise the government's borrowing limit in May or the government will risk defaulting on its debt.

Meeting those deadlines could involve more spending cuts or tax increases. Either could further slow growth.

The economists' views suggest that the budgetary paralysis hurts the economy in at least two ways: It's eroding consumer and business confidence, which could reduce spending and investment. And it will trigger the government spending cuts that are about to kick in.

These come on top of the reduced take-home pay for most workers caused by the Social Security tax increase that took effect Jan. 1.

Businesses “aren't willing to hire people or invest in plant and equipment knowing the uncertainty,” says Sung Won Sohn, an economics professor at California State University Channel Islands. “The prudent thing to do is to postpone.”

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