Towards Financial Freedom
In Brief - US: Fiscal Deal?!?
- The agreed fiscal "deal" or "compromise" (or formally referred to as the American Taxpayer Relief Act of 2012) at the outset of2013, while theatrical, crass and intense, is not the end of the line. Aside from deferring the sequestration debate temporarily until Mar 1, the timing of the debt ceiling decision is another unresolved hurdle. Technically, the US debt limit is not about sovereign risk or default, it is merely a political lever. Although we expect Congress to lift the debt ceiling, a more persistent squabble resulting from the ongoing political dysfunction would be adding to the confusion, eventually sparking acute aversion to risk-taking and potentially spawning credibility problems. In actuality, however, the longer-term fiscal sustainability issue is the bigger elephant in the room (and there is still no clarity on this issue).
- From a near-term growth perspective, the piecemeal concession on fiscal policy (the White House's Fact Sheet provides awhole gamut of agreed measures)--that partly includes the expiration of the payroll tax credit (the most eye-catching item, but not unanticipated), a larger capital gains and dividends tax (that appends a new 3.8% health care tax for higher income thresholds), some temporary extensions (emergency and extended jobless benefits, bonus depreciation, "doc fix" and the "dairy cliff"--all for one year), but also a smaller increase in tax revenues (given the higher income thresholds on the marginal tax rate hikes)--amounts to a drag of roughly 1% of GDP in 2013, according to our estimation. While the aforementioned magnitude is more-or-less comparable to our prevailing baseline estimate (kindly refer to our Nov 8 note, "US: Drag, Bite, Shock & Cliff"), the list of expiring provisions differs to some extent. Still, the pending sequestration decision in two months has the potential to modestly dilate the ongoing fiscal drag to around 1.5% of GDP in 2013.
- Hence, we largely maintained our 2013 outlook, with picayune changes to 2q12 growth (tweaked down a couple of tenths toaround 2%). Essentially, we anticipate real GDP to expand by 1.6% in 1q13--first-half growth of slightly less than 2% on balance--and 2.0% on average for the entire 2013, with downside risk. Indeed, if the full sequestration is triggered in Mar (in view of the lop-sided emphasis on revenue in the current deal), all else equal, real GDP growth might average closer to 1.5% for the full-year, with first-half 2013 growth perhaps at roughly 1% on balance. Also, the uncertain response to the expiration of the payroll tax cut--with a bite of slightly more than 0.5% of GDP according to our estimation--could alter the contour of our 2013 outlook (our current forecast assumes a more disperse response from consumer spending, on balance, growing at a rate of modestly greater than 1.5% in the first-half).
Source: OSK
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