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As economic recovery sags, would a federal budget deal hurt or help?

Vice President Biden and congressional negotiators met again Wednesday to try to reach a deal on the budget deficit and US debt. As the economic recovery falters, how not to imperil it is a top consideration.

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But the economic outlook has darkened in recent weeks, raising the stakes in this debate. Among the sobering signs:

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•The pace of US growth has been slower than expected during the year's first half – near a 2 percent annual pace, adjusted for inflation. That's not fast enough to bring down unemployment. In May, the official unemployment rate ticked up to 9.1 percent.

•The global economy has also lost momentum, with emerging nations like China and India struggling to tamp down inflation pressures. In addition, Japan has slowed since the March earthquake and tsunami, and Europe is struggling to contain concerns about whether nations like Greece will be able to finance their public-sector debts.

•The credit rating firm Moody's joined Standard & Poor's in issuing a warning that the United States needs to get its fiscal act together, or risk a downgrade of its public debt rating. A downgrade, while not considered imminent, would push up the cost of borrowing throughout the US economy.

An underlying problem is that economic recoveries following a financial crisis tend to be slower than typical rebounds from recession. Millions of US consumers continue to struggle with high levels of household debt, banks are still burdened by troubled loans, and the government – partly because of stimulus efforts – has seen its own debt level soar.

The risk is that high debt loads will hamper economic growth for years to come (see chart). In its mainstream forecast, the Congressional Budget Office currently envisions tepid growth of about 2.5 percent a year during the second half of this decade.

Sometimes, efforts to fix the problem can bring complications of their own. Just look at Greece. To retain a credit lifeline from neighboring nations, the country has embarked on an austerity program while also paying sky-high interest on new loans. In its case, government spending cuts appear to be crimping economic activity and tax revenues.

By contrast, if a nation can speed up the growth rate for its gross domestic product, that can help not only job creation but also the process of digging out of debt.

Some economists argue that if the goal is to get unemployment down and growth up, now is the wrong time to make big changes to the budget.

"It is not the time to cut spending or raise taxes," given how fragile the economy is, says Robert Shapiro, a former economic official in the Clinton administration who is now at Sonecon, a policy consulting firm in Washington.


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