Tuesday, December 10, 2013

Update: Budget Deal is Reached

by Bill McBride on 12/10/2013 08:10:00 PM

Some good news ...

From the NY Times: Congressional Negotiators Reach Budget Deal

The agreement eliminates about $65 billion in across-the-board domestic and defense cuts while adding an additional $25 billion in deficit reduction by extending a 2 percent cut to Medicare through 2022 and 2023, two years beyond the cuts set by the Budget Control Act of 2011.
...
Under the agreement, military and domestic spending for the current fiscal year that is under the annual discretion of Congress would rise to just over $1 trillion, from the $967 billion level it would hit if spending cuts known as sequestration were imposed next month. Spending would be capped at $1 trillion in fiscal year 2015 as well.
And from the WSJ: House, Senate Negotiators Announce Budget Deal
Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term unemployment benefits, sought by Democrats, wasn't included.
In 2013, the key downside risk to the economy was Congress (specifically the House), and unfortunately they delivered. Hopefully this eliminates that risk for 2014.

On the economics, the sequester cuts were a disaster (they probably hurt the economy more than it helped reduce the deficit), so reducing the sequester cuts for 2014 is a positive. I'd like to see an extension of emergency unemployment benefits for another 6 months or a year, but that isn't included in this deal.

The bottom line: Although this deal was expected (and I expect the bill to pass), this is another reason to be optimistic about 2014. Also - even though Fed officials will deny it - I think this increases the odds of the Fed tapering in December or January 2014.