Goldman Sachs: House Spending Cuts Will Hurt Economic Growth

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ABC News' Jonathan Karl reports: A "leaked" confidential new report prepared by Goldman Sachs for its clients says spending cuts passed by the House of Reps. would be a drag on the economy, cutting economic growth by about two (2) percent of GDP. Here's the Report: . Proposals to cut federal spending, the possibility of a government shutdown, and the escallated debate over state employee compensation has increased interest in the effect of fiscal policy on growth, after last year's fiscal package briefly neutralized the expected drag from federal fiscal policy. . Federal spending cuts deserve the most attention. They are the most likely of these issues to occur, and could have the largest magnitude. The assumption we incorparated into our recently revised budget estimates -- discretionary spending cuts of $25bn and $50bn below the CBO baseline for FY2011 and FY2012 respectively --would shave nearly one percentage point off the annualized rate of real GDP growth in Q2, but would fade quickly with a negligible effect on growth by year-end. . The related risk of a temporary federal government shutdown could also lead to a fiscal drag on growth, but this appears to be a lower probability scenario. We estimate that each week that the federal government is shut down would reduce federal spending by around $8bn, and could reduce real GDP growth by as much as 0.8 pp at an annualized rate in the quarter it occurred, but would provide a lift to growth in the following quarter as federal activity returned to the previous level. . The policies that several state governments are debating related to state employee compensation and organization appear to have -- at least in the short term -- little potential macroeconomic effect. We assume that state governments will cut spending or raise taxes no more than necessary to balance their budgets. This amount will be determined by the level of tax receipts available to pay for spending, not political negotiations. Fiscal drag is quickly reemerging as a focus, only a couple of months after an agreement to extend tax cuts and unemployment benefits appeared to have neutralized most of the drag from federal fiscal policy for most of 2011. We see federal spending cuts as the most important near-term risk. The possibility of a government shutdown is a significant but less likely factor, while the debate over state employee compensation seems unlikely to have a meaningful near-term macroeconomic effect .... ____ This "leaaked" report, reportedly written by Goldman's economist Alec Phillips goes on to suggest that even those more modest spending cuts will cut economic growth rates by one percent of GDP. This is reportedly a GOLDMAN SACHS' economist ... consider the source!! But, is this what republican leaders are meaning to do, cause the economic growth to sputter thereby blaming President Obama in 2012? This article by reporter Johanthan Karl may be read further @ ABC News, dated 2/23/11