Channel NewsAsia

US economy set for solid growth, shrinking deficit

The United States is expected to post solid economic growth of more than 3.0 percent through 2016, accompanied by a shrinking deficit, a government agency said on Tuesday.

WASHINGTON: The United States is expected to post solid economic growth of more than 3.0 percent through 2016, accompanied by a shrinking deficit, a government agency said on Tuesday.

The Congressional Budget Office, the non-partisan analysis arm of Congress, said in its latest report that the federal government's tax and spending policies would not constrain economic growth as much as they had in 2013.

And state and local governments were expected to increase spending after several years of budget tightening, the CBO said.

In its economic and budget outlook report for 2014 to 2024, the CBO predicted growth in gross domestic product (GDP) at 3.1 percent this year and 3.4 percent in 2015 and 2016.

But growth would fall to 2.7 percent in 2017 and continue to slow "to a pace that is well below the average seen over the past several decades," largely because of slower growth in the labour force due to the aging population and mild inflation under 2.0 percent for the next several years.

Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades.

The CBO predicted the unemployment rate would end this year at 6.7 percent, unchanged from December 2013, and decline only gradually, dropping below 6.0 percent in 2017.

It estimated that President Barack Obama's signature health-care reform, the Affordable Care Act, would cost the economy at least two million full-time jobs in the coming years.

In its latest analysis, the CBO projected employment would be reduced by two million jobs in 2017, after the major provisions of the reform known as Obamacare have taken full effect, and rising to 2.5 million in 2024.

"Some provisions will raise effective tax rates on earnings from labour and thus will reduce the amount of labour that some workers choose to supply," the CBO said, leading some workers to elect not to be employed at all or work fewer hours.

The federal budget deficit was expected to continue to fall this year and the next before rising through the decade.

The deficit, which stood at 4.1 percent of GDP in 2013, was seen falling to 3.0 percent of GDP this year - at $514 billion - and 2.6 percent in 2015.

Debt was seen declining to 74 percent of GDP by the end of the year and to 72 percent of GDP through 2017, but then rising, hitting 79 percent of GDP by the end of 2024.

The agency highlighted that debt relative to the size of the economy was "very high" by historical standards. As recently as the end of 2007, debt stood at 35 percent of GDP, before budget deficits ballooned amid government spending to offset the 2008 financial crisis and the deep recession.

"Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government's debt)," the CBO report said.

The report came a day after Treasury Secretary Jacob Lew warned the nation was in danger of defaulting on its debt by the end of February if Congress failed to lift the debt limit.

He urged Congress to increase the borrowing authority by the end of the week, saying the Treasury was expected to exhaust extraordinary measures to prevent default by the end of the month.

In the absence of congressional action, the temporary suspension of the debt limit will expire on February 7, locking in the ceiling at the total amount borrowed on that date. US debt currently stands at $17.3 trillion.

Delaying action "can cause harm to our economy, rattle financial markets, and hurt taxpayers," Lew said in a speech at the Bipartisan Policy Centre on Monday.

The debt battle looms large in Washington this week, with Republicans calling for spending cuts to be tied to the debt limit legislation and President Barack Obama insisting he will sign only a bill that excludes conditions.

Tweet Photos, Videos and Update on this Story to  #cna