According to Goldman Sach’s U.S. Daily written by Jan Hatzius, disappointing economic data coupled with increased public focus on the U.S. Debt has put added pressure on the Government to take immediate and effective measures to curb the Fiscal Cliff problems. With the elections scheduled to be held in just about 4 months, legislative activity regarding fiscal policies is most likely to pick up. Figure 1 shows how things stand.
Here are some of the most important fiscal policies and what to expect of them.
The 2001/2003 Upper Income Tax Cut
The 2001/2003 tax cut for individuals with income under $250,000 is likely to be extended by another year.
“The President implored Congress to extend as soon as possible the middle income tax cuts first enacted in 2001 and 2003. At around $200 billion per year (including interaction with the Alternative Minimum Tax) these are the single largest component of the “fiscal cliff” of policies set to expire under current law at year end, and make up about one third of the total. The President’s remarks today did not break new policy ground–he already called for extension of the 2001/2003 tax cuts for income under $250,000 in his budget in February–but they set the stage for the action later this month in the US House.”
Although, elections will turn the way Congress looks at this policy, it would still take some time after elections for Congress to implement significant changes to the tax cut policies.
“Following the election, we still think the most likely scenario is another temporary extension of the 2001/2003 tax cuts in their entirety during the lame duck session of Congress in December, though this obviously depends on the election result and the economic situation at the time. If a short-term extension of the tax cuts is indeed enacted later this year, the longer term fate of the tax cuts–particularly the upper income tax cuts–would not be resolved until sometime in early- to mid-2013, when the election results have taken effect and a long-term deficit reduction package is likely to be high on the agenda.”
Federal Spending Cuts
The sequester or automatic spending cuts that goes into effect starting January 2013 is likely to be postponed temporarily because of added pressure from industries such as Defense and lack of political agreement before the upcoming elections.
However, holding off the sequester temporarily would not be as easy as it would appear.
“While many lawmakers may be motivated to delay the sequester, there is less agreement on how to offset the budgetary cost of doing so. The House passed legislation in May to reverse most of the sequester for one year, replacing it with domestic spending cuts spread out over the next ten years instead. By contrast, Democrats in both chambers of Congress have indicated that increased tax revenues must also play a role. Resolving these disagreements before the election looks nearly impossible, and after the election in the lame duck session of Congress it will still be a challenge to delay the sequester more than temporarily. Instead, we think it is more likely that Congress will opt to delay the sequester for less than a year. For example, lawmakers would need to agree to $25bn in savings elsewhere in the budget to delay the sequester until April 2013, which would allow lawmakers to address the issue again in early 2013, possibly in the context of a broader fiscal agreement.”
Payroll Tax Cut and Unemployment Benefit
Payroll Tax Cuts and Unemployment Benefits compose 1/4th of the fiscal drag. Lack of informal discussions regarding employment benefits may indicate that they are not going to be continued starting 2013. However, emergency unemployment benefits might be continued because the cost of the policy is low and the labor market is still struggling. Payroll tax cuts policy is a huge fiscal drag on the Government and is likely to stopped by year-end as neither party seems enthusiastic about it.
“That said, it is worth noting that last year the White House did not propose extension until late June, after the first of what became a string of weak employment reports last year. If Congress opts for a short-term extension of the other issues that make up the fiscal cliff, as outlined above, there is a possibility that the payroll tax cut could be extended for a short period along with the other expiring policies. Nevertheless, since neither party appears to be enthusiastic about extending it, we are reasonably confident that the payroll tax cut will expire in 2013, even if the timing is not entirely certain.”