Even if a deal is reached, U.S. fiscal policy will tighten early next year. But growth should nevertheless rebound over the course of 2013.
E ven if the middle-class tax cuts are extended and most of the sequester spending cuts are avoided, U.S. fiscal policy is likely to tighten by an incremental 1-1.5 percentage points of GDP early next year. This fiscal drag will take place due to the expiration of the payroll tax cut, the winding down of emergency unemployment benefits and the introduction of new taxes to finance health reform.
Taken together, these fiscal measures are likely to push down growth to around 1% in Q1 of 2013.
However, a resolution to the remaining elements of the fiscal cliff should pave the way for stronger growth over the balance of the year. In particular, the growth picture in 2013 is likely to benefit from the reacceleration in business investment, which appears to have been adversely affected by recent fiscal uncertainty.
A further improvement in the housing market, continued progress in household deleveraging and the diminished drag from cutbacks at the state and local government levels are also expected to be major sources of growth acceleration.
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