Insights: U.S. Budget Deal Large in Size But Little “New” Stimulus

Posted December 7, 2010 by CLeahey

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• The ongoing White House negotiations with Congress have produced a budget compromise which avoids expansion-threatening fiscal drag in early 2011.
• Virtually all of the reported $900B package (cost over 2 years) would extend existing programs and would not be considered new stimulus, but it eliminates the potential fiscal drag which could have scuttled a slow motion recovery.  The only new stimulus is a one-year 2% payroll tax cut for employees ($120B) which replaces an expiring middle income wage tax credit ($60B).
• Efforts to stimulate the economy and extend the Bush tax cuts complicate efforts to deal with the potential US sovereign debt crisis.   We think investors are willing to give the administration and Congress until next spring to offer up a credible deficit reduction plan.  Around March and April, the US debt limit will be breached, an important deadline for the US to get its fiscal house in order.

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