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North America Economic Research |
Quick fiscal cliff update
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The Senate-passed budget deal is broadly in line
with our prior fiscal cliff expectations, which is to say a
resolution which imposes considerable near-term headwinds to growth
while doing very little to address longer-run fiscal sustainability
issues. The table below summarizes our current assessment of the
fiscal drag associated with fiscal-cliff-related measures, which we
still see subtracting about 1%-point from GDP growth in
2013.
The heart of the deal is the extension of lower-
and middle-income Bush tax rates combined with a variety of rate
and non-rate upper-income tax increases. Relative to current
policy, those upper-income measures are projected to raise revenue
by $624 billion over a ten-year horizon. By comparison, under
current policy (the CBO's "Alternative Fiscal Scenario") deficits
over that period should amount to $9.975 trillion, and so the
upper-income revenue increases should close about 6% of the
ten-year budget gap. Beyond the ten-year horizon the contribution
to sustainability is equally minimal (see "The ten-year mirage" on
morganmarkets).
As expected, the payroll tax holiday was allowed
to lapse on schedule. Moreover, Emergency Unemployment Compensation
was extended for another year. The sequestration associated with
the Budget Control Act was deferred for two months. The fate of
these across-the-board budget cuts come March remains uncertain.
This uncertainty, combined with the unresolved fate of the debt
ceiling, probably curtails any "certainty bounce" in confidence
that would be expected with the resolution of the fiscal
cliff.
Finally, this deal has only made it through one
chamber of Congress, and we will update our assessment if there are
subsequent changes to the legislation.
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(1-212)
834-5523
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