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‘Fiscal cliff’ risks becoming fiscal prairie

Without a deal between U.S. President Barack Obama and lawmakers, impact could be felt for a long time yet.

JONATHAN ERNST/REUTERS

If the two words "fiscal cliff" were engineered to scare Washington lawmakers into prompt, bipartisan co-operation, they didn't do the trick.

But whatever the ultimate outcome from last-minute negotiations between U.S. lawmakers and the White House to avert $600-billion (U.S.) in tax increases and spending cuts come the new year, uncertainty is expected to linger.

And this could unsettle the U.S. economy for months – even years – to come, some forecasters say.

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"There is still a big adjustment that needs to come and that will continue after 2013," said Jan Hatzius, an economist at Goldman Sachs, in a recent video interview on the investment bank's website.

He predicts at least a 1.5 percentage point hit to U.S. GDP growth, even if some kind of agreement is reached.

Beyond 2013, he expects the drag on economic output to subside, with modest GDP growth of roughly around 3 per cent.

"Fiscal adjustment is going to be a fact of life for a long time to come. We do think things are probably going to get a little less bad after next year," Mr. Hatzius said.

Similarly, others see this overall move toward less spending and higher taxes continuing for the foreseeable future. Instead of a cliff, maybe a better analogy is a prairie landscape, where the current course of fiscal restraint continues for as far as the eye can see.

"We assume that the tax increases and spending reductions that are scheduled to occur next year (totalling more than four per cent of GDP) will be phased-in evenly over the next four years, reducing GDP growth by about one percentage point each year," wrote Sal Guatieri, senior economist at BMO Capital Markets in a recent report.

"This will hold the 2013 annual growth rate to 2.3 per cent."

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But where the impact of restraint could be most evident to ordinary Americans is not on the macro level of GDP numbers, but on everyday household finances.

The devil may not be in the big decisions about spending levels and tax brackets, but in capital-gains taxes and numerous other small details.

"Spending and investment decisions by households and businesses will remain constrained until outstanding issues are decided, such as allowed depreciation and capital gains and dividend taxation," said economists at Scotiabank.

They also forecast a one percentage point drop in U.S. output growth if Washington lawmakers reach a partial fiscal solution.

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About the Author

Guy Dixon is a feature writer for The Globe and Mail. More

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