by Bill McBride on 1/02/2013 04:28:00 PM
Wednesday, January 02, 2013
Since most people are complaining about the fiscal agreement, I'll point out a few positives ... first, remember the "fiscal cliff" was about too much austerity too quickly. The "fiscal cliff" included expiring tax cuts (income, payroll), expiring spending (unemployment insurance, etc.) and the "sequester" (mostly defense spending cuts). The sequester has been delayed for two months, so we don't know the size of the cuts yet, but ...
1) There was an agreement, and earlier in January than I expected!
2) It appears the amount of austerity will not drag the economy into a new recession. I would argue for a different mix of policies, but reducing the amount of austerity was achieved - and this was a key goal for the fiscal agreement.
3) Although long term debt sustainability is still an issue, the deficit is declining right now - and will decline further in 2013. David Wessel at the WSJ wrote about the declining deficit a few weeks ago: Putting the Brakes on Cutting the Deficit
The deficit—the difference between government revenue and spending—is shrinking even before the year-end fiscal cliff or a last-minute compromise to avoid it. In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1% of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9% of GDP in 2010, 8.7% in 2011 and 7.0% in fiscal 2012. Private analysts predict the deficit will be between 5.5% and 6.0% of GDP in fiscal 2013, depending on the outcome of the budget talks.We still don't know the details of the sequester, but I expect the deficit to be close to 5.5% of GDP this year. Still high, but improving. Unfortunately there are some longer term issues, especially with health care, but in the short term the deficit is moving in the right direction - and will decline further as the economy improves.
4) We don't have to look at those dumb countdown timers for a couple of months.