» Prospects: Federal Budget Impasse Again! Decision Economics

Prospects: Federal Budget Impasse Again!

Posted May 1, 2013 by rvillareal

  • While the most recent economic indicators have been softening, the U.S. economy has been relatively resilient in the face of the large increase in fiscal drag from the January tax increases and the March sequester.  Still the point of maximum vulnerability is between now and Labor Day, when the effects of the sequester are fully phased in and tax payers have decided how to respond to the tax increases. [private]
  • The Obama budget held few surprises, offering as much as $150B in new stimulus and a $1.8 trillion deficit reduction package similar to the one offered to Congress in December.
  • The Senate budget resolution resembles the Obama proposals closely, while the House passed a budget similar to last year’s resolution, with $4.6 trillion in outlay reductions and no tax increases.
  • Republicans are ready to adopt the $1.1 trillion in outlay reductions in the Obama budget but are unwilling to accept another $0.7 trillion in tax increases.  However, Obama has indicated that the ultimate deal must have some tax increases.
  • For the moment we are at an impasse.  The next debt ceiling limitation, which could be breached as early as mid-May, but more likely later in the summer, might force a compromise.  Until somebody blinks, investors may be facing another bruising confrontation.  There is a chance that policymakers may just “give up” on deficit reduction this year since the deficit is expected to fall dramatically until 2015 without additional policy action.