What Lower Government Spending Will Do To GDP In 2012

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Photo: US Navy

Via Calculated Risk, here’s JPMorgan on what lower spending next year means for GDP:Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

Two things to note: One is that this isn’t due to any special cuts. It’s mostly just the run-off of past stimulus. Furthermore, this has been the case for the while. Government has been a net GDP drag on growth, with the private sector (mostly) looking robust.

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