Consumer Sentiment, Job Creation Could Suffer if Congress Fails to Reach a Deal

According to a White House report cited in the WashingtonPost, if Congress fails to reach a deal that would renew for the Bush-era tax cuts for middle class Americans, the economy may suffer. Among other consequences, consumer spending could plunge by $200 billion dollars, since middle-class Americans may become reluctant to spend if they are forced to pay $2,200 more in taxes. Consumer sentiment could also take a hit. Although 2007 marked the highest level in consumer sentiment, it declined rapidly in the summer of 2011 during the negotiations over the debt ceiling. Consumer sentiment has recovered since then and currently, it stands at its highest level in over 5 years. However, the Council of Economic Advisers warns that the fear of the “fiscal cliff” could drive down consumer sentiment and consumer spending. The Congressional Budget Office (CBO) also seems to concur with some of the findings of the Council of Economic Advisers, mainly that an extension of middle-class tax cuts could provide a much-needed boost to the economy. The CBO estimates that such an extension would result in a 1.3% increase in GDP and could help add up to 1.6 million jobs. Currently, it appears that negotiations are at a standstill. Although in recent days some top Republicans said they were willing to break Norquist's anti-tax pledge, Republicans and Democrats have not reached a deal to avoid the major spending cuts and tax increases that are set to take effect in 2013.