Finance professionals: Fiscal cliff could sap U.S. economic growth

Finance professionals warn that U.S. economic growth is in jeopardy if budget issues cannot be resolved quickly, a survey released Monday by the Association for Financial Professionals (AFP) indicates.

Respondents to the AFP Business Outlook Survey predict that U.S. GDP will grow 1.7% in 2013, creating an additional 1.3 million jobs. Almost half (46%) anticipate improved U.S. business conditions in 2013, with much of this growth occurring in the second half of the year.

But respondents caution: Congress and the White House must act immediately to resolve long-term budget deficits. “Many companies are poised on the brink of growth,” Jim Kaitz, AFP’s CEO, said in a news release. “But political theater is having a crippling effect on corporate spending and hiring, even corporate decision-making.”

More than 60% of the respondents think the solution must be a combination of spending cuts and increased tax revenues, according to the survey, which has tracked business predictions of CEOs, corporate treasurers, and other financial executives for the past nine years.

It’s the latest survey of financial professionals to cite political wrangling over the fiscal cliff—which includes about $600 billion in tax increases and spending cuts that go into effect on Jan. 1—as a downer. Economic optimism, which started the year on an upswing, fell to a 12-month low, according to the quarterly AICPA Business & Industry U.S. Economic Outlook Survey, released Thursday.

“The overwhelming majority of comments this quarter focused on the fiscal cliff and government or politics,” said the AICPA report, which polled CPAs who hold executive positions in companies across an array of industries. “Pessimists were most concerned about government policies and inability to get things done, particularly with the fiscal cliff, the results of the election and the level of government debt, deficits and spending.”

The threat of the fiscal cliff is affecting organizations’ decisions on hiring and capital investments, according to the survey. Any agreement that defers decisions on fiscal issues would not be acceptable to corporate financial executives.

Almost two-thirds of organizations said Washington’s inability to reach consensus on a number of issues of economic importance makes them at least somewhat more hesitant to make investments for growth, according to the AFP, which conducted the survey from Nov. 26 through Dec. 7. The survey generated more than 1,300 responses from finance professionals including CEOs, vice presidents of finance, and treasurers across a range of industries.

Thirty-six percent of organizations have taken at least one action against the uncertainty surrounding the fiscal cliff, the report said. “If the White House and Congress should not reach a compromise by the end of the year, even greater corporate caution could be in play.” Another 52% are poised to take some action that would impact workers or investments geared toward growth, the report said.

Of those organizations that have already taken some action, 55% have reduced or delayed capital spending, 52% have frozen or reduced hiring, and 27% have shrunk payrolls, the report said. Others have shortened the duration of their short-term investment portfolio (22%), reduced inventory levels (21%), tightened credit standards for trading partners (16%), or delayed payments to vendors (11%).

To improve business conditions and stimulate hiring and investment, AFP respondents said, Washington must agree on a long-term plan to reduce the federal budget deficit. Most respondents said this should be done with a blended approach. But 35% think the deficit should be reduced mostly through spending cuts. Four percent emphasized tax revenue increases as the solution to reducing the deficit.

Other actions that could trigger increased corporate growth include reforming corporate taxes and addressing the regulatory burden on corporations, survey respondents said. 

—Jack Hagel (jhagel@aicpa.org) is the JofA’s editorial director.