There’s only one thing we know for sure about next year’s campaign for President: the winner will have no time to celebrate.
But before we get to that, here are some of the key issues that affect how much fiscal drag the US economy will confront in the next couple of years (all numbers courtesy of Nomura analysts). Below, for various major spending items, we’ve listed the expected decline relative to the prior year.
Discretionary spending caps resulting from the debt ceiling agreement, troop drawdowns, and small expiring tax provisions at the end of 2011: $69bn, or 0.5 per cent of GDP.
Expiration of payroll tax holiday at the end of 2011: $112bn, or 0.73 per cent of GDP.
Expiration of extended unemployment benefits: $56bn, or 0.37 per cent of GDP.
Expiration of Bush tax cuts at the end of 2012: $238bn, or 1.5 per cent of GDP.
That’s a total drag of about 1.6 per cent of GDP for 2012 and 1.5 per cent for 2013.
* As we understand it, there’s some chance that the expiration of the payroll tax holiday and extended unemployment benefits will be pushed back, at least partly. But this will require more legislation and in this environment, well, we’re not betting on anything.
Now we come to the ongoing Super Committee shenanigans. (For a brief recap of what the committee needs to do, see our earlier post, and there’s a longer explanation in the Nomura paper that we’ve posted in the usual place). The committee — official name: the Joint Select Committee on Deficit Reduction, or JSCDR — has until November 23 to send its proposal to Congress, which has until December 23 to ratify it.
If it fails to agree on a way to reduce budget deficits by $1.2 trillion over the next ten years, then a series of automatic cuts, in a process called “sequestration”, will take effect beginning in 2013 to make up for the shortfall.
The latest from the weekend is that the JSCDR might try to find some partial agreement and just pass the responsibility for broader tax reform and certain revenue raising measures to the relevant Congressional tax writing committees to deal with later. Knowing how close to a deal the committee is continues to be nearly impossible – which makes sense, as in this case much of the debating probably should take place behind closed doors.
But it seems highly unlikely that the committee will arrive at an agreement that meets or exceeds the $1.2 trillion requirement.
So with all this in mind, here are some issues that the election winner will immediately have to deal with:
1. The sequestration cuts. I.e. the cuts that are automatically triggered if there is no comprehensive JSCDR deal, described above. Something to note here is that just because sequestration was included in the debt ceiling deal as motivation for the committee doesn’t mean those cuts will ever actually be applied. As we said, they aren’t scheduled to hit until 2013, and the cuts would affect issues close to the hearts of both Republican (defense cuts) and Democratic (Medicare) lawmakers. That was the whole point.
So there’s a good chance these cuts will be revisited after the election and legislated away. Ryan Grimm of the Huffington Post gave the best early treatment of this issue back in September, and as far we know, nothing has changed.
2. The expiration of the Bush tax cuts. How this gets handled will partly depend on the state of the economy at the time of the election. That’s anybody’s guess, but it’s an issue that’s sufficiently partisan that you can expect a similar debate to the one we had at the end of last year.
3. The debt ceiling. Yes, you read that correctly.
We’ll let Goldman analysts explain:
Based on our FY2012 deficit forecast along with non-deficit financing needs and accumulation of Treasuries in federal trust funds (which count toward the debt limit) borrowing authority might be exhausted by November or December of 2012, not long after the presidential election. Exhibit 6 shows the projected level of debt subject to limit, against (1) the debt limit of $16.394 trillion, (2) that limit increased by $230bn (the amount of extra borrowing authority the Treasury might be able to tap by disinvesting certain government trust funds) and (3) that amount, increased by another $300bn, which represents the higher debt limit that would be established if the super committee were able to reach an agreement of at least $1.5 trillion.
Awesome. (And we haven’t even mused on the rating implications.)
4. Miscellaneous. A good contender for what might fall into this category are the same provisions that are expiring at the end of this year — extended unemployment benefits and the payroll tax holiday — assuming that their expiration is pushed back. For all we know, the economy may well be recovering strongly by the end of next year, but it’s unlikely to have reduced unemployment to the extent that these issues wouldn’t come up again, especially unemployment benefits.
All of this will have to be negotiated in the aftermath of what is sure to be yet another bruising, polarising campaign. And who knows what complications will emerge if there’s a lame duck chamber of Congress or, especially, a lame duck president.
So we’d like to extend an early congratulations to the winner: just don’t spend too much time basking in your newfound glory and don’t promise a new day of bipartisan harmony. Neither will last.
The return of AAA US political risk – FT Alphaville