In a report to investors, Goldman Sachs is cautioning about slower growth next year due to Republican-led efforts to trim spending.
The modest spending cuts we assume in our own budget forecast would lead to renewed fiscal drag. Since spending cuts could be enacted no earlier than next month, when the current fiscal year will be nearly half over, $25bn in cuts would require spending in the second half of FY2011 to be reduced by $50bn at an annual rate. Since the cut would be phased in abruptly, it could result in a drag on growth in Q2 by as much as one percentage point (pp), but would quickly fade over the next two quarters as spending stabilizes at a lower level, with little effect versus current policy on the rate of real GDP growth by year end.In the current weak recovery, a percentage point of economic growth is the difference between job gains and job losses. The Republican plan could retard growth by more and over a longer period.
The spending cut package that passed the House of Representatives would have a deeper effect. Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp to 2pp in Q2 and Q3 compared with current law.
Rep. Boehner has already said that if federal jobs are lost, "so be it." Apparently, the same attitude applies to the country's job growth.