- Congress averts fiscal cliff at the last minute but debt ceiling looms.
- Fiscal tightening of 1% of GDP and still no resolution to longer term debt challenge.
Two hours past the 31 January deadline, a US budget deal was passed by the Senate and the House approved the legislation this morning. The deal averts the immediate fiscal cliff, avoiding major tax hikes for most US households, but it does not include raising the debt ceiling or any longer-term budget cuts. These have to be negotiated in connection with raising the debt ceiling in February or March. Hence, although politicians have handled the most imminent threat to growth, political uncertainty will persist over the coming months.
In terms of growth impact, the deal is line with our expectation. The overall fiscal tightening looks to come in at close to 1% of GDP, implying a fiscal drag of just above 1pp on 2013 GDP growth. There is of cause still uncertainty on this estimate as we do not know what a final deal on spending cuts will look like. We have assumed that spending cuts in 2013 will be slightly less contractionary than those embedded in the Budget Control Act (BCA).
Details of the US budget deal
• The Bush tax cuts have been extended for individuals earning less than USD 400,000 and couples earning less than USD 450,000 per year but will rise from 35.0% to 39.6% for those earning more.
• The alternative minimum tax (AMT) has been permanently indexed for inflation.
• The spending cuts in the BCA have been put off for two months. Lawmakers have until 1 March to find alternatives to replace the USD 1.2trn in spending cuts in the BCA over the next 10 years.
• The emergency unemployment benefit has been extended for one year.
• As we expected, the payroll tax cut is being allowed to run out, which means an increase to 6.2% from 4.2% in 2012 in the workers’ payroll tax rate. This implies a significant hit to US household income this year and is the reason for our forecast of private consumption growth of just below 1% q/q AR in Q1 13.
• Taxes on capital gains and dividends have been raised from roughly 15% to 20% but only for individuals earning more than USD 400,000 and couples earning more than USD 450,000.
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