Spending cuts will hinder recovery, Goldman Sachs warns

Spending cuts will hinder recovery, Goldman Sachs warns

Spending cuts as deep as proposed by the Republicans will take away the early momentum of recovery, bank and investment firm Goldman Sachs warned today.

House Republicans have pushed a bill that would slash $61 billion in federal spending from March to September this year. The measure will shave off 1.5 percent from U.S. economic growth to just 2 percent in the 2nd and 3rd quarters. The Fed last week released a forecast of 3.4 percent to 3.9 percent expansion for this year.

Goldman Sachs said the most likely scenario is that the final bill will reduce the proposed spending cuts to $25 billion, in which case less harm will be inflicted to the economy. In the report, the Wall Street bank said there will be a 1 percent drop in growth for the second quarter but it "would quickly fade over the next two quarters as spending stabilizes at a lower level."

The sweeping budget cuts are expected to get the thumbs down from Democrats in the Senate where they still hold the majority. Even if the bill passes, President Barack Obama can still nix it through a presidential veto.

Goldman also estimated that in case Congress brings the issue to a deadlock, a federal government shutdown may ensue, costing 40,000 federal workers their jobs and a decline of 0.2 percent in GDP every week.

Senate Majority Leader Harry Reid said in a statement that "Democrats remain committed to working with Republicans to reduce the deficit in a responsible way without hampering our economic growth and American jobs."

Posted by James Fried on Thursday February 24 2011, 4:03 AM EST. Ref: CNN. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0