If the tax deal reached between congressional Republicans and President Barack Obama is ratified, it most certainly will add to the ballooning budget deficit, but according to Pimco, the stimulative measure will contribute much to economic growth.
On Monday, President Obama unveiled a compromise deal that would extend all Bush-era tax cuts for two years, as well as extend unemployment compensation for the long-term jobless, and reduce social security payroll taxes for 2011 by 2 percentage points. The plan, still to be approved by the House and the Senate, also resets the estate tax at the lowest rate in 80 years -- with the exception of 2010, when it was zero.
Following the measure, Pacific Investment Management Co., manager of the world's largest bond fund, raised its growth forecast for the U.S. economy to between 3% and 3.5% for 2011 from an earlier estimate of 2% to 2.5%, CEO Mohamed El-Erian told CNBC late Thursday. El-Erian also shares the title of co-chief investment officer with Bill Gross.
However, El-Erian added that to keep the growth going beyond 2011, the U.S. will have to do more. In a commentary for Bloomberg News he wrote:
Pimco, a subsidiary of financial services giant Allianz (AZ), is not alone in raising its U.S. gross domestic product forecasts based on the tax deal: Many economists did the same. Goldman Sachs (GS), which raised its 2011 GDP forecast to 2.7% from 2% even before the deal was struck, said on Tuesday the tax package could add 0.5 to 1 percentage points of growth on top of that.
The impact of the measures on economic growth will erode over time if not accompanied by two additional policy efforts. Officials must explain how further short-term deterioration in America's budget deficit will eventually give way to medium-term fiscal responsibility. In addition, we need a more meaningful push to improve America's long-term competitiveness, which has been compromised by our lagging behind in infrastructure improvements and education, as well as resource misallocations.