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EuroWire – November 2007
38
Transat lant ic Cable
Heading into fall, many analysts were tamping down
their expectations and trimming their economic forecasts. On
22
nd
August, Citigroup issued a new forecast indicating that
growth would fall short of its earlier estimates. On the following
day Goldman Sachs, which had already reduced its forecast to
1.9%, warned that the housing market was probably overpriced
by more than 15%. Other forecasters also now believe that the
housing slump, which has had only a modest effect on consumer
spending and economic growth, will lead to a slowdown over
the next year or two.
Global Insight (Waltham, Massachusetts) on 23
rd
August
predicted markedly slower growth for the third quarter, and
reduced its forecast for all of 2007 to 1.9% from 2.1%. The
research firm also sees dimmer prospects for growth in 2008.
Negative factors – along with high oil prices and slower growth
in productivity – are the stasis in housing and a credit squeeze in
the wake of the countrywide lending spree. As always, the view
fromWashington tends to be sunnier than from other places.
Also on 23
rd
August, the Congressional Budget Office (CBO)
predicted that the summer’s turmoil in markets would not retard
economic growth, even as the agency warned of uncertainties
and pared its earlier forecast for growth this year to 2.1%,
from 2.3%.
The CBO brought the same double perspective to the federal
budget. Noting that the budget deficit would decline this year
to $158 billion, the lowest level since 2002, it also reiterated
warnings that the trend is ‘unsustainable’ in the long term.
The budget office estimated that – if tax cuts introduced by
President George W Bush are extended indefinitely beyond
their expiration date in 2010, and Congress continues to protect
most taxpayers against increases in the alternative minimum
tax – over the next 10 years government revenue would fall
$3.4 trillion short of the baseline forecast. Deficits would return
to high levels of more than $200 billion a year.
Celebrating the decline in the budget deficit, Mr Bush said:
“It shows that our government is on a path to meeting the goal
I set forth of putting the budget into surplus by 2012.” Of course,
if the goal is not met it will be the problem of Mr Bush’s successor
– who will have his or her hands full on many other counts, as well.
And now for something new:
the average American grows poorer
Data published in late August by the Internal Revenue Service
show that in 2005, for the fifth consecutive year, Americans
earned a smaller average income than in the peak year of 2000.
Except for a single year since the end of World War II in 1945,
this experience of income contraction is unique. Nearly half
of Americans reported incomes of less than $30,000 in 2005;
two-thirds made less than $50,000.
The new tax statistics show that, while the combined income
of all Americans in 2005 was slightly larger than it was in 2000,
population growth over the period makes for a smaller average
income. The growth in total income (as distinguished from
average income) was concentrated among those making more
than $1 million. Over the five years to 2005, the number of these
taxpayers grew by more than 26%, to 303,817, from 239,685 in
2000.
A sore point with Citizens for Tax Justice, a private advocacy
group for low and middle-income Americans, is that the
millionaires, who constitute less than a quarter of 1% of all
taxpayers, accounted for almost 47% of the total income
gains in 2005 as compared with 2000. According to a separate
analysis by the group, whose headquarters is in Washington,
DC, people with million-plus incomes also received 62% of the
savings from the reduced tax rates on long-term capital gains
and dividends that President George W Bush signed into law in
2003. The nearly 90% of Americans who make less than $100,000
a year collected 5.3% of the total savings from reduced tax rates
on investment income. They saved an average $318 on their
investments.
A White House spokesman, Tony Fratto, said the fact that
those in the upper-income brackets accounted for nearly all
of the income growth and that the majority of investment tax
breaks went to those making more than $1 million was ‘not a
very interesting story.’ Mr Fratto attributed the drop in average
income to ‘the significant wrenching hits that [the US] economy
took in 2001 and 2002, so no one should be surprised that what
a bubble economy created in the late 1990s and 2000, where
economic data were skewed, would take some time to recover.”