Obama signed the “fiscal cliff” resolution into law yesterday but I’ve noticed a bit of confusion about exactly what was, and wasn’t, resolved under the deal. In case you’ve got any confusion about it here’s a wrap from HSBC explaining where we’re at.
Near-term disaster avoided; problems remain
- Washington policy makers avoid a fiscal cliff, but fail to make substantial progress on long-term deficit reduction
- The fiscal drag of the deal in 2013 amounts to about US$115bn, we estimate, about half of what we were expecting; more could come, however, once the Congress decides on spending cuts later in the spring.
- Federal discretionary spending cuts postponed for two months, setting up another fiscal showdown in March
Acting after the 31 December deadline for scheduled tax increases and across-the-board spending cuts had already passed, Congress hastily enacted legislation late Tuesday to avoid pushing the economy over the fiscal cliff. Sizable tax increases have been avoided, while draconian cuts in federal spending have been postponed.The legislation removes the threat of immediate and severe fiscal contraction.
In that regard, it eliminates an important near-term risk for financial markets. However, the compromise legislation does little to reduce long-term fiscal deficits and an expected increase in the ratio of federal debt to GDP. We estimate that the agreement just legislated by the Congress will impose less of a fiscal dragon the economy than we had previously expected. Indeed, it appears that the fiscal constraint only amounts to about US$115bn in the near term, about half of what we were expecting.
There may be more constraint to come over the next few months once Congress starts to grapple with formulating longer-term spending reduction. We had estimated a fiscal drag of about 1.0% of GDP for 2013. For now, it appears that there will be less than that in 2013. How much less depends on what Congress does in the next few months. However, the lack of significant progress on long-term deficit reduction increases the risk that the major credit rating agencies will lower the US sovereign credit rating at some point this year, in our view.
Washington will face a trio of potential crisis points in thenext few months. The scheduled “sequester” of across-the board spending cuts has been postponed, but only for two months. The bill passed yesterday did not increase the federal debt ceiling. The Treasury reached its statutory borrowing limit at the end of December. The Treasury’s ability to skirt the debt limit will be exhausted in about two months,setting up another possible showdown. Congress did not pass a budget for Fiscal Year 2013, and the federal government isoperating on a six-month continuing resolution (CR) budget that expires on 27 March.
The Congress will have to pass a budget for the rest of the fiscal year. If not, a shutdown of government activity could ensue. Financial markets will, once again, soon have to face the risk of disruptive policy maneuvers playing out in Washington.
Shane Oliver, from AMP, also provided the following report which provides some additional content. All up it was a good compromise, but didn’t resolved all of the outstanding political issues so we risk going through it all again come early March.
AMP Capital – US Budget and Debt