As economy lags, CBO adds fuel to debate on tax breaks

McClatchy NewspapersAugust 19, 2010 

WASHINGTON — Just in time for the fall election campaigns, a new report Thursday showed jobless claims jumping unexpectedly, providing new fuel for the debate over what economic, fiscal and political path might lead the way to recovery.

First-time filings for unemployment benefits rose last week by 12,000, reaching 500,000 for the week, the highest level since last November. Economists had expected the claims to drop.

At the same time, a new nonpartisan update on the federal budget noted that one way to create jobs and boost the economy would be to extend the Bush-era tax cuts, which now are set to expire Dec. 31. The Congressional Budget Office said that extending the tax reductions and other tax measures would knock nearly a full percentage point off the unemployment rate next year, but at the cost of higher budget deficits and debt.

The two reports served as a stark reminder that jobs and the economy will dominate debate in Washington this fall as Congress weighs whether to extend the Bush-era tax cuts and the campaigns begin for control of Congress.

President Barack Obama, who told an audience in Wisconsin just days ago that "we're headed in the right direction" on the economy, said the jobs report underscored the need for Congress to pass a bill that would help small business by easing credit.

He stressed that the bill would be offset and not add to the budget deficit, and blamed Republicans for blocking it.

"This is a bill that makes sense, and normally we would expect Democrats and Republicans to join together," he said before leaving town for a vacation on Martha's Vineyard in Massachusetts. "Unfortunately, a partisan minority in the Senate so far has refused to allow this jobs bill to come up for a vote."

In its analysis, the nonpartisan CBO says it expects the economy to continue to grow by a meager 2 percent in the fourth quarter and that it doesn't expect the jobless rate to drop to 5 percent until the end of 2014.

"The recovery from the economic downturn will continue at a modest pace during the next few years," the budget office said.

"The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will weigh on consumer spending."

A key question that Congress, the president and voters face is how tax reductions or increases will affect that growth, as well as the federal budget.

The CBO said the current year's deficit would top $1.3 trillion. That's $27 billion better than the previous forecast in March, it said, and $71 billion better than last year's deficit. It's 9.1 percent of the economy, however, the second worst level in 65 years. The worst was last year, when the deficit was 9.9 percent of the gross domestic product.

Obama proposes making the Bush tax cuts permanent for individuals who earn less than $200,000 a year and couples who make less than $250,000. He'd let the tax reductions expire for those who earn more than that.

Republicans — and some Democrats — want to make all the tax cuts permanent or at least to extend them as long as the economy remains fragile. They fear that a tax increase would hurt recovery.

Indeed, the CBO said the economy and jobs outlook would be helped under one scenario, in which most tax reductions_ except the lower rates for the wealthy — were extended and federal spending restrained.

The economy would be 0.6 to 1.7 percentage points bigger next year, the CBO said, and the unemployment rate would be 0.3 to 0.8 percentage point lower by the end of 2011.

That added growth would come at a cost later, however.

"Later in the coming decade, real GDP would fall below the level in CBO's baseline because the larger budget deficits would reduce investment in productive capital," the budget office said.

ON THE WEB

The CBO's report on the economy

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McClatchy Newspapers 2010

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