There’s been a lot of discussion about the deficit super-committee lately, and whether the bi-partisan panel can come up with a package, or whether it’s doomed for gridlock.
But whatever they decide to do, the near-term impact on the economy will be pretty minimal. The automatic trigger cuts don’t kick in until 2013, and they can be watered down. Same, even, if they actually propose a plan… it probably wouldn’t have much impact on the economy.
But there is one decision that has to be made in a few weeks that absolutely would have an impact, and that’s whether the payroll tax cuts that were agreed to late in 2010 will be extended again.
Morgan Stanley explains the economic stakes:
We flag two more risk events connected to the Super Committee fiscal policy negotiations. The first relates to extension of the emergency stimulus measures of 2011. A payroll tax cut and extended unemployment benefits are slated to roll off at the end of 2011, which would comprise a $175bn or 1% of GDP change in the deficit. However, these stimulus measures could be continued through inclusion in a Super Committee deal or an end-of-the-year appropriations bill, commonly known as an “extender bill.” Our sense is that Congress will ultimately scramble to continue these benefits, one way or another, to avoid alienating voters in an election year.
In the sclerotic current atmosphere of Washington, DC policymaking, continuation of existing stimulus measures appears to be the most likely kind of stimulus. This could potentially raise our US Economics team’s 2012 GDP forecast of 2% by 0.5%-1%, improving the global risk environment and somewhat moderating our case for USD strength. However, we doubt that that this small boost would
completely negate forward-looking growth worries that we believe will support USD in 2012.
On the other hand, if Super Committee negotiations and the vote on its measures become a protracted, bitterly partisan process, it is possible that Congress will lose the political will to extend the $175bn of benefits scheduled to roll off. In this case, the US would face a significantly higher degree of
fiscal contraction in 2012 than in 2011, further exacerbating the USD strength we predicted in the previous section.
As for the politics of it, Sam Stein at Huffington Post has a good rundown of the President’s strategy. Basically, he’s going to make this a central part of his strategy, hoping to make it impossible for Congress to leave on holiday without a deal to avoid having people’s taxes raised.
“I find it hard to believe that these members of Congress are going to go to National Airport on December 23 and go home, and basically tell their constituents your taxes are going up $1,000 next year and we didn’t do anything to help the economy,” said one administration official.
The simpler legislative route for the White House may be to make a big push on the payroll tax cut prior to the Thanksgiving break. In previous briefings, administration officials have argued as much. On Nov. 23, the deficit-reduction super committee is supposed to offer its set of recommendations. The president and his staff have made little secret of their desire to see the super committee tuck the payroll tax cut extension (along with other elements of the president’s jobs package) into that proposal. Democratic aides on Capitol Hill have largely agreed.
Bottom line, the decisions made in the next few weeks on this are important enough to affect your economic models and forecasts for the next year.
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