The U.S. budget deal is mildly good news: Alini

It doesn’t tackle the debt ceiling

Erica Alini 0
CP

CP

On Thursday evening, the U.S. House of Representatives approved a bipartisan budget deal with an overwhelming majority of Republicans voting “yay.” The bill must still clear the Senate next week, but the major political hurdle has been overcome. Time to toast with eggnog and head to the ski slopes?

Yeah, kind of. Politically speaking, this is a small Christmas miracle. It signals that the wind has changed within the GOP. The Republican leadership finally seems to have decided that appeasing the tea party is doing more damage than good. The hope is that this budget deal will herald a couple of years of bipartisan compromises, at least until the 2016 presidential election. The political paralysis in Washington might be over.

In terms of its impact on the U.S. economy, though, the current budget bill is pretty underwhelming. For the past four years, the federal government has been a drag on U.S. GDP growth, in two main ways: Austerity and uncertainty. It cut spending and jobs and raised taxes at a time when the recovery was still very fragile, and it kept lurching from crisis to crisis, keeping American businesses and families in limbo as to what legislation that directly affects them might look like. And while it did short-term damage, Washington failed to do the two things that could have produced important long-term gains: Put health care spending and social security on a sustainable fiscal path and reform the country’s garbled and unfair tax system. The budget deal doesn’t completely eliminate the two short-term drags and doesn’t contemplate the two long-term fixes.

In terms of austerity, the budget deal does away with many, but not all, of the across-the-board sequester cuts that were scheduled to take effect in the new year in the absence of new, superseding legislation. The previous $90 billion in spending cuts scheduled for 2014 would to be likely cut in half, which will reduce the economic drag from the sequester to 0.3 percentage points of GDP growth, down from 0.6 percentage points, according to TD’s Beata Caranci. At the same time, though, the bill does not extend extraordinary unemployment insurance for some 1.3 million Americans who have been jobless for over six months and whose lifeline will run out on December 28. This isn’t just a cruel shoulder-shrug toward the country’s long-term unemployed. It will also hurt consumer spending, which could shrink by as much as $39 billion, according to numbers provided by the U.S. Labor Department and Moody’s Analytics.

In terms of uncertainty, the budget deal funds the government through the fall of 2015, which should take away the risk of another government shutdown until then. The bill, however, says nothing about the debt ceiling. The cap on overall federal government spending was temporarily suspended at the end of October, but will kick in again on Feb. 8 at whatever level the debt will have reached by then (likely around $17.3 trillion). On that day, in other words, the U.S. will have already hit its next spending ceiling and the U.S. Treasury will have only limited wiggle room to push back an official default, which could come between late February and mid-March. Regardless of the budget, the country could stumble into another fight over borrowing levels as soon as three months from now.

Considering how things would have looked like in the absence of even a small bipartisan compromise, this budget deal is still good news. But “good” here is a very relative attribute.

Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. 

Follow @ealini

 

 

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