Study predicts US deficit cuts will slow growth

US economic growth will slow to 1.4 percent in 2013, partly as a result of austerity measures dividing Washington, according to a study by the Congressional Budget Office released Tuesday.

The CBO projected that US gross domestic product will rise 1.4 percent this year, down from its estimate of 1.9 percent in 2012, which itself is slightly lower than the official US growth estimate for last year -- 2.2 percent.

The CBO's prediction for 2013 is significantly less than estimates from the IMF (2.1 percent) and Federal Reserve (between 2.3 and 3.0 percent).

The CBO estimated that 2013 growth would be twice as strong without the automatic across-the-board budget cuts that are to go into effect March 1 if the administration and Congress don't agree on an alternative.

Also hampering growth was an automatic income tax rate hike that kicked in on January 1 for the richest Americans. Payroll taxes increased slightly for all workers on the same date.

"If all of the fiscal tightening still embodied in current law for 2013 was removed, growth in real GDP would be about 1.5 percentage points higher this year than CBO currently projects," the study said.

"About 1.25 percentage points of that effect comes from the automatic reductions in federal spending, the expiration of the cut in payroll tax rates, and the increase in marginal tax rates on higher income; the spending changes and the combined tax changes account for about equal portions," it said.

But, the public deficit will be two times smaller than in 2009, the peak year of President Barack Obama's economic stimulus program, and will fall to 5.3 percent of GDP by the end of fiscal 2013, which ends September 30, the study found.

For the first time since 2008, the deficit will drop below the symbolic trillion dollar mark to $845 billion, it said.

US public debt will remain at record levels and at their highest since the Second World War.

"Throughout the 2013-2023 period, debt held by the public is projected to be significantly greater relative to GDP than at any time since just after World War II; at no time is it anticipated to fall below the percentage of GDP it represented in any year between 1951 and 2012," the CBO said.

The CBO's projections will feed into a fiscal debate that is raging between Democrats and Republicans about how to steer future US finances.

Disagreements between the two parties have led to gridlock in Congress and the CBO's latest projections appeared unlikely to pave the way to agreement.

The House Democratic whip, Steny Hoyer, said: "The challenges posed to our economy by deficits will not be overcome by ignoring the need for job creation, or by taking a severely imbalanced approach to deficit reduction."

However, Representative Paul Ryan, who ran alongside defeated Republican presidential nominee Mitt Romney, said the new report reinforced the need to cut spending.

"The CBO's report is yet another warning that we need to get spending under control. The deficit is still unsustainable. By 2023, our national debt will hit $26 trillion. We can't let that happen," Ryan said.

"This isn't a partisan issue. It's math. Unless the president and the Senate offer a credible plan to close the deficit, we will have a debt crisis -- and the country will suffer," he added.