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Inaction in Washington Weighing on Economy: S&P

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Forget the $1 trillion infrastructure plan and sweeping tax reform that President Donald Trump once touted. Neither is going to happen anytime soon, according to S&P Global Ratings. 

“We no longer believe the federal government will be able to push through even a small infrastructure-spending package — much less the $1 trillion the White House has suggested,” said U.S. Chief Economist Beth Ann Bovino in a new report, “The Departed: Can U.S. Lawmakers Spur GDP Growth When They Return?”

(Related: Businesses Salivate Over Trump’s Tax Ideas, but Will They Happen?)

Bovino expects instead “a small tax cut of $500 billion, rather than true tax reform” as midterm elections approach. It won’t be permanent, however, and therefore not as effective as a major tax reform package, which requires bipartisan support, said Bovino.

(Related: Trump’s Massive Spending Cuts Unlikely to See Daylight)

The smaller stimulus and tax cut, coupled with a growing aging population and cuts in immigration, mean that U.S. economic growth will “likely” slow to below the current 2% annual growth rate, said Bovino. She said the imposition of hard tariffs could further weaken the economy, but she doesn’t expect they will be adopted. 

On the plus side, S&P Global Ratings has reduced its odds for a recession over the next 12 months to 15%-20% odds from 20% to 25% in May.

(Related: US Has Until at Least September to Lift Debt Cap, Analysts Say)

But well before then, near the end of September, the government will run up against the debt ceiling, and lose the ability to borrow in order to keep operating if the debt ceiling is not raised. If lawmakers fail to agree to raise the ceiling, the government would shut down.

Bovino expects “lawmakers will come to their senses and avoid such a fate,” but notes the ongoing debate about the debt ceiling will weigh on the economy and is incorporated in S&P Global Ratings’ ‘AA+’ sovereign rating.

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