Zandi Says Failure to Extend Tax Cuts Would Reduce U.S. GDP

Mark Zandi, chief economist at Moody’s Analytics Inc., will tell lawmakers that failure to extend the payroll-tax cut and emergency unemployment benefits would “deliver a significant blow” to the U.S. economy.

Economic growth in the U.S. will be reduced by 0.7 percentage point in 2012 if both programs aren’t extended through year-end, Zandi said in remarks to be delivered to the Joint Economic Committee of Congress today. If the programs are extended, the world’s largest economy will expand by 2.6 percent, he said.

“A self-sustaining economic expansion is close at hand, but only if policy makers do not pull their support from the economy too quickly,” Zandi said in prepared remarks. “Not extending these programs would deliver a significant blow to the still-tentative economy.”

Congress is deciding whether to prolong a two-percentage point reduction in the payroll tax and unemployment insurance that covers those out of work for up to 99 weeks before both expire at the end of the month. Lawmakers agreed to extend the benefits for two months past a Dec. 31 expiration because they couldn’t agree on how to finance the provisions for 12 months.

The impact on the labor market “will also be meaningful,” costing more 500,000 jobs and raising the unemployment rate by at least 0.3 percentage point by year-end, Zandi calculated. The jobless rate was 8.3 percent in January.

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