Goldman’s Alec Phillips weighs in on what the
budget dealreached in Washington last night (which still hasn’t been voted on or passed) means for the economy.
Congressional negotiators have announced an agreement to reverse some of the spending cuts under sequestration over the next two years. Our forecast already assumes a small fiscal deal along these lines, but the spending level for 2014 and 2015 built into the final deal is somewhat higher than we had assumed. If enacted, it would reduce fiscal drag in 2014 by 0.1pp compared with our current expectation. Enacting even a modest deal should also help to ease growing concern about US political dysfunction, particularly regarding fiscal policy. This has practical implications in early 2014, since Congress needs to extend spending authority by January 15 to avoid another government shutdown, and must raise the debt limit again in March. The agreement, if enacted, reduces the already low risk of a shutdown in January, since 2014 spending levels were the main source of disagreement headed into that deadline.
This simple chart shows the significance of the budget deal, spending wise:
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