The Future of the Fiscal Cliff
By Bondsquawk
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.”
12 Comments
Having been around long enough. The phrase “fiscal cliff” when it’s done will be something my 16 month year old son can step off of with out holding my hand. If I’m lucky some of you will be scared enough by those who hope you sell your investments so they can buy them from you. I hope to be one of them.
The more I hear Krugman scare everyone into thinking it matters the more I know it will be nothing but a short term buying opportunity for those who know in the end the term “fiscal cliff” is really another Keynesian/Wall St. tantrum. It will eventually be put on the shelf next to Y2k
Heck the only “fiscal cliff” Jan Hatzius is worried about is his 3 year cliff vesting Defined Benefit plan. As long as he can scare the hell out of those who need to get elected with wonderful graphs his 3 year cliff vesting will work out just fine.
If..we would stop supporting Wall St we would not need to worry about the need to worry about the govenment reducing expenditures or raising taxes to drain money out. WE would have an economy which the private would be the driver. And THAT private sector would be the most RESPONSIBLE prudent investment drivers for our future. WHY? Because they would be the ones who came in after the poor stewards of capital. They would be the ones back in 97-98 or 2003 which would have invested wisely bearing fruit 10 years later. Ahh haa that is today.
Yes..fiscal cliffs happen when you need the govt. to make up the slack. Imagine the fiscal cliff in Europe if they cut back? Get to the root of why we need govt. spending to make up the shortfall. DO THAT.. then determine if QE, LTRO and extensions of benefits are just a cover up to mask problems which havn’t been fixed.
IF QE3 or whatever is a form of papering over bad policy. Then it should never be done. If it is a pardon for crimes committed by Wall ST. then the fed is as guilty as anyone. There is no excuse in bailing out Wall St..just because policy makers can’t agree on proper fixes.
Why would they BEN? when you bail them out with QE? You are the man with the money when Wall St. Spends an hour behind bars. I’m going to call you the “Ben the Bail Bondsman” Except you get nothing in return. None of us do.
I think the fiscal cliff will be for real and catch VII by surprise. If the Republicans lose the presidential election, which I think is a good bet, then they will be determined to sink the economy, and Obama may be forced to call their bluff this time. If Romney wins, the Dems may decide its time that they played a little hardball of their own.
We’ll see…
Detroit Dan- Your right….the fiscal cliff will come up and surprise me like Shaquille Oneal trying to surprise me at a bar in the cultural diverse city of Galway, Ireland.
I’d send you all the white papers and blog articles I’ve read on this surprise fiscl cliff we’ve been discussing for 12 months but they all run the same way. It goes like this. Problem, Create Fear, more fear, pay money to Nobel Laurete economists who are experts, write white paper, market sell off, fiscal cliff turns into curb while those who take political sides forget they lost sleep on something those of us make money buying from others just made money again. Repeat.
The fiscal cliff is merely a boogeyman that will be extended forever (but only a year or two at a time) and will repeatedly be used to distract the public from the real issues, and score political points without actually doing anything constructive.
It’s the same as the debt ceiling: a problem created by politicians for politicians.
Pay no attention to the man behind the curtain…
In today’s news, the GOP cutting food stamp spending
http://www.google.com/hostednews/ap/article/ALeqM5heYShw7m9xujVD29dBQU72w5MbLQ?docId=bc168c678f9647d98da3f60df386e7c9
And while complaining that Obama wasted time on healthcare, are now themselves wasting time trying to repeal healthcare.
I’m not quite sure what VII is saying – if he is saying it won’t be a surprise then I agree. But VII, if you say it isn’t going to happen, and if it does happen if won’t impact corporate profits and therefore the stock market, then I can’t agree. The GOP seems hell bent on “fiscal responsibility” and that means cuts, cuts and more cuts to social spending. Spend a mere 5 minutes with the Ryan budget to see their deficit/debt fear mongering, and the above link for them actually acting on their rhetoric. Granted, the amount in the story above is small, but they are indeed drawing a line in the same that will be almost politically impossible for them not to continue to protect
I agree with you RE: impact to not only coporate profits but anything in which or to whom was a beneficiary.
Europe and the recovery since 2008 in the U.S has shown me the heart of our policy makers. When push comes to shove they take the Ben Bernanke road. They do their Job. They don’t lead but do their. Job one is to take care of those who vote for you. If you follow this fiscal cliff..when push comes to shove there will be NO cliff. Yes..my stance is when it comes down to it who ever is in office will promote growth of some kind. Bottom Line. Think about what Obama said in Chicago many years ago when referring to increasing the federal deficit targets. And then when it was his turn to feel the impact of not doing so..he switched.
I will say this again..I’ve read more than I should on this topic and when it’s all said and done…there will be NO CLIFF. This like every other fiscal problem no matter how loud the GOP barks and no matter how much you hate the GOP will be nothing but more wasted ink.
Answer me this. Why would anyone allow the economy to go off a cliff? if you answered politically that the GOP is the devil then what will the Dems do? They will point out to the public what is going on much the same way you responded to me and for that reason…you will hate them more than you should. Thinking they will tank the economy your vote will go to the Dems…and the only way for the GOP to get your vote back is to solve the fiscal cliff. This whole thing is a waste of time. Somewhere in a bar next to every ATM Y2k is laughing his ass off over this human fear replay we watch time and time again.
Ah. The fiscal cliff is about $ 7 trillion in size. But I heard Obama talk about taxcuts to the tune of $ 5 trillion. And we all love taxcuts, right ?
So, if we assume the “fiscal cliff”is going to occur it will still be some $ 2 trillion in size. Still a lot of money.
More over, I think the current fiscal cliff will undergo A LOT OF modifications making the cliff less steep. Is going to be interesting to see how steep the final fiscal cliff is going to be. And $ 2 trillion are still A LOT OF bargaining chips.
What I like about the “fiscal cliff” are the elimination of A LOT OF the itemized taxdeductions. It makes the taxcode more simple. If your business depends on one or more tax exemptions then your business model is wrong. It will certainly increase unemployment under tax consultants.
The GOP is hell bent on winning the presidency. If they do they will no longer be debt/ deficit hawks, just like it wasn’t important when Bush was president. The Dems will also reverse their stance if they lose. The party that cares about the debt and deficit is the party who doesn’t control the whitehouse.
There is no difference of any importance between the two parties, they are corrupt and only interested in maintaining their power. They may say different things, and have strongly different statements regarding divisive, but trivial, issues. But it’s irrelevant what they say, look at what they do. The reality is in their actions and they act exactly the same way, looking out for themselves. Nothing will change until we change it.
There never really has been that much of a difference between the two parties, which is why, in the past, they have been able to roll enough logs to get things done.
Now, sadly, they have convinced themselves, and are trying to convince the public (and largely succeeding in that attempt) that they are radically different. Compromisers are traitors. Ask Justice Roberts how that feels.
But this debt can was kicked down the road, then surrounded with landmines labelled sequestration just to make it look like the can could no longer be kicked. Anyone wanna make a bet? The bomb squad is on the way, and NFL kickers are already auditioning. The only question is if they are dumb enough to let the clock run down too far before they kick the damn thing again.
does anyone see/use “follow comments” – pragcap had it 6 months or so ago, but not since for me, so i miss replies.
anywho…. if you’re all correct that the GOP will keep deficits high, it will be via even higher military spending ala Bush and Reagan, and more cuts for those who already have substantial savings and no debt. both fail to address today’s problems with edu, infrastructure, HC spending, and the cities/states still crushed under the weight of the housing bubble collapse like Stockton, and only add to record income inequality. the dem’s are lightyears from being perfect – but Romney says he wants to dramatically increase military spending despite the fact that it doubled since 9/11 and is 23% of the Fed’s budget, while he plans to repeal the ACA “on my first day”. Is that all just empty talk too???
The most scary thing about the “fiscal cliff” is the rise in the capital gains tax from 15% to 60%. Who wants to hang on to their gains sells his shares now instead of next year. So, expect more “volatility” up ahead.