Goldman's Guess At 'Cliff' Compromise Composition

Tyler Durden's picture

With hope high that TPTB will see fit not to plunge us over the cliff, we thought it useful to get some perspective on what the grand compromise might look like. Goldman's central assumption - albeit a close call - is that an agreement is found that includes a tax increase of a magnitude similar to the upper income tax cuts, though the composition might differ. Entitlement reforms also seem likely to be part of a package, particularly related to health programs. "Down-payments" in both areas seem likely, with additional deficit reduction to be enacted in 2013 as part of a two-stage process. The working deadline for an agreement appears to be December 21. While talks are ongoing, we, like Goldman, would not expect serious negotiations to begin for another couple of weeks. In the interim, headlines out of Washington are likely to be mixed, but we would expect more negative than positive news until at least mid-December.

Via Goldman Sachs: The Fiscal Cliff: Q&A on the Shape of a Year-End Agreement

Q: Will an agreement be reached by the end of the year to avert most of the fiscal restraint now scheduled for January 2013?

A: Our central assumption is that an agreement will be reached prior to year-end, but it remains a close call and there are several obstacles that must be overcome first. The most important is to find some way past the disagreement on the upper-income tax cuts. The President insists that he will sign no further extensions into law, while congressional Republicans oppose any increase in tax rates, which would occur if the tax cuts were allowed to lapse. There is more common ground on the concept of raising revenue. However, congressional Republicans have stipulated that revenue increases should come only with significant reforms to entitlement programs, and they prefer to raise revenue through tax reform, while congressional Democrats and the Obama Administration prefer to raise rates. While most of the media coverage of the fiscal cliff is focused on whether an agreement can be reached on the tax component of a package, overcoming disagreements on how much to reduce entitlement spending is a sizeable challenge as well.

Q: If a deal is reached, what might it look like?

A: Our best guess is a tax increase similar in size to the upper-income tax cuts and a "downpayment" on entitlement reform. Allowing tax rates to rise and other policies to expire for incomes over $250,000 would increase revenues by slightly more than $800 billion over ten years starting in 2013. The White House has opposed a compromise that does not involve an increase in tax rates, but this does not preclude an agreement that relies on a limitation of tax preferences for a good part of the revenue increase, along with increased rates to make up the remainder. As we outlined last week, some combination of rate increases and limitation of tax preferences seems to be the most obvious path to an agreement at year-end.

On the spending side, it is even less clear what types of policies might be enacted at year-end, but some changes to Medicare and Medicaid appear likely to be included, along with perhaps some of the miscellaneous cuts--federal employee retirement benefits, agricultural subsidies, postal reform, among others--that were discussed in last year's debt limit negotiations but never enacted. Congressional Republicans have emphasized the need for structural changes to health entitlements as part of the package, rather than cuts in payments to health care providers and other methods Congress typically relies on to find budgetary savings.

Q: Will it be a single package or two-stage process?

A: The focus continues to be on a two-stage process. Since last year's debt limit discussions, negotiations have tended to focus primarily on a two-step process, in which an initial round of tax increases and spending cuts are enacted immediately, and targets are agreed to for an additional round of spending and tax reforms to be detailed at a later date. The current debate seems headed in this direction as well. The President is seeking $1.6 trillion in new revenues, but it seems very unlikely that the year-end deal would actually enact such a large increase. Instead, it is possible that if policies are enacted at year-end that raise an amount similar to the upper income tax cuts (i.e., around $800bn), any additional revenue that is agreed upon could be targeted as part of a tax reform effort in 2013.

Entitlement reforms are even more likely to be dealt with in a two-stage process. Some of the changes that might be made to entitlement programs--particularly Medicare and Medicaid--get into more complex areas of health policy that would be difficult to sort out in the next few weeks. More than most other areas, this is a segment of the budget where it is difficult for political leaders to hammer out details at the last minute, and instead where more thorough consideration in the congressional committees with expertise on the programs is likely to be necessary.

That said, there is no reason that all of the substantial reforms that might be made to the tax code and entitlement programs would need to wait to 2013. Most of these changes have been debated for years, and in a few cases, for decades. And while some of these reforms are indeed complex, not all are. For example, an across-the-board limitation on tax preferences or a gradual increase in the Medicare eligibility age would be relatively simple to write into legislation, if there is political will to do so.

Q: How much deficit reduction might an agreement involve?

A: Probably between $1 trillion and $2 trillion over ten years. The agreement that may be reached at year-end should be considered in the context of last year's debt limit agreement, the Budget Control Act of 2011. That law cut projected spending by $2.1 trillion over ten years by capping congressional appropriations and imposing the automatic spending cuts under the "sequester" set to take effect January 2013. We assume that the spending caps will remain in place and that, while sequester will be mostly reversed for 2013, a comparable level of savings will be phased in over the few years that follow.

If an agreement is reached by year-end, it seems likely to target at least $1 trillion over ten years in net deficit reduction, and might reach as high as $2 trillion if lawmakers include aggressive targets for entitlement reform and tax reform in a two-stage framework. That level of deficit reduction, if realized, would likely be sufficient to stabilize the debt/GDP ratio over the next several years, though to do so would involve a pace of fiscal restraint that would weigh on growth for the next few years as that deficit reduction took hold.

Q: Will it address the debt limit?

A: It seems likely. The debt limit will need to be raised by February or March 2013, if not before. Policymakers have been urged by business leaders, rating agencies, and others to avoid another messy debt limit debate, and could include a debt limit increase in the year-end deal. To the extent that the agreement involves immediate policy changes, as well as targeted changes to be detailed in 2013, this could be enough to satisfy House Speaker Boehner's insistence that the next increase must be matched with deficit reduction of the same amount (measured over ten years). Since including the debt limit increase in a year-end deal would be advantageous for the White House, the Administration might be willing to make concessions in other areas in order to include it.

Q: What's the working deadline to reach an agreement?

A: December 21. This is the end of the week before Christmas, and members of Congress will be eager to return to their home states in time for the holiday. If a deal has not been finalized by that point but one appears close at hand, Congress might remain in session over the weekend, to December 22 or 23. It is worth noting that in 2010 and 2011, the year-end fiscal agreements (to extend the 2001/2003 tax cuts and the payroll tax cut, respectively) were enacted on December 17 and 23.

Q: What will the path be to that agreement?

A: Bumpy, with periods of inactivity. It is unclear whether the President and congressional leaders will meet before next week, so developments over the coming week may be restricted mainly to comments from different parties to the talks and media reports on the proposals being contemplated. Next week, it seems likely that discussions will intensify somewhat, but serious negotiations seem unlikely until mid-December. Over the next four weeks the headlines out of Washington are likely to be mixed, but we would expect more negative headlines than positive ones, at least until mid-December.

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Seasmoke's picture

i see another deal in the making on CHRISTMAS EVE !!!

NewThor's picture

Santa Claus is the father of Fiat Currency.

Get your money for nothing and your gifts for free.

Mark Carney's picture



I tuned into a webinar today put on by Economic Development Corporation (Fed agency, if not sure their mandate look em up).  They focused on the world and especially Canadian exports and future growth.  Their Chief Economist was very optimistic about USA (Canada’s main trading partner) and how they are thriving in the housing market and how we are on the verge of sustainable growth….in other words I was shocked and laughing about all is points and how he took economic numbers and fudged them to sound positive…so I asked him questions…..


1)Today, the capital goods new orders came in and confirms USA in recession, what are your thoughts?.....suffice to say, he danced around it and said it was because of a summer dull drum   (sure, whatever you say)


2)You stated that the American consumer debt/income ratio dropped to 110% from peak of 163% do to deleveraging, and Americans paying down debt…but isn’t it really because most of the deleveraging is due to Americans defaulting on loans and banks writing down the losses….. he said, WOW you sure are asking tough questions, then agreed and asked for another question….


I pretty much called him out on his lies and he had no response, made him look foolish J


mayhem_korner's picture



Defaulting is the new deleveraging.  It's been in vogue for about 5 years now.

youngman's picture

And welfare is the new career choice

DaveyJones's picture

they didn't drop one "L" by accident

odatruf's picture

So let me make sure I am 100% clear: in order to make a deal to get the deficit under control, we need to undo the prior deal to get the deficit under control. In order to do this, we need to make up a scary term, such as fiscal cliff, for the positive deficit effect of the lower spending and higher taxes that will go into effect in the future so that there will be pressure to avoid it. The reason the cuts and taxes were put off into the future was because putting them into effect at the moment of the deal had to be avoided. So next, we'll negotiate a plan that will contain lower spending and higher taxes and since doing both right now should again be avoided, we will set a deadline for those plans going into effect in the future.

It's crystal fucking clear to me now; we are in Neverland.



DoChenRollingBearing's picture

Hey, don't despair.  The Powerball has a jackpot of $500 Million!

The drawing is late tomorrow night.  Details and arithmetic:

odatruf's picture

Thanks DoChen, but I have not yet begun to dispair....


Panafrican Funktron Robot's picture

Goldman to muppets:  a compromise will be a "close call" but will happen.

Time to load up the shorts.

slaughterer's picture

So we know the positions:

Pelosi is LONG at ES 1350

Reid is SHORT at ES 1405.

What is Boehner and Obama?

stocktivity's picture

Is anyone else sick of hearing the term "fiscal cliff"? It has to be the most overused expression of 2012 in the English language. We all know there will be compromise before the deadline. Such crap!

101 years and counting's picture

i just love this. GS acts like they havent already given congress the "compromise"  really quite hilarious.

CrashisOptimistic's picture

This GS report is sub par.

Fuck 10 years.  The question is what happens to 2013 GDP.

Both sides have essentially ALREADY AGREED to let the Payroll Tax Rate cut expire and that's $120 Billion in fiscal DE-STIMULUS, or about 0.8% of GDP and GS didn't see fit to address it.

Similarly, the upper income segment of the Bush rates are quoted to "raise $800 billion in revenue over 10 years".  Is that 80B in 2013?  Only 2013 counts.  Fuck the outyears.  80B / 15.2T = .005 or 0.5% GDP impact.  So just those two items are 1.3% drag on a GDP clocking in at about 2% for 2012.

EVERY ADDITIONAL PENNY OF SPENDING CUT OR TAX JACK IS GOING TO DRAG GDP, and as you drag GDP you reduce revs and increase spending on unemployment (disability) and grow the deficit. 

Note that if they said okay, we won't hit GDP, we'll do this 10 year bullshit and defer it past 2013, I'm gonna take a baseball bat to their face for not cutting the deficit.  I fucking HOPE they try to avoid 2013 GDP hit, because if they do the agencies will crater AAA to AAa-.

LawsofPhysics's picture

GDP reporting is already a fucking joke.  What in the fuck makes you think it will matter either way?  America is the pre-collapse Soviet Union.  The outcome will be the same.  And yes, GS also scripted and profitted from the collapse of the soviet union.

Zap Powerz's picture

Nothing is going to change until the system breaks and the control of the system is removed from human hands and given to mother nature.

Politicians are too cowardly and corrupt to make good decisions for anyone but themselves.  They are too beholden to TPTB to make a good decision for anyone but the PTB.

Expect the status quo to continue until that point at which it is no longer possible to continue and then it will break; there will be unimaginable pain and suffering.

Have a nice day.

odatruf's picture

Zap - while I agree with all of what you've written, I must add that you've let the dumb as rocks voters and public off the hook.  Sure, politicians are beholden to TPTB and they are cowardly and corrupt, but hasn't every message voters have sent them rewarded and affirmed that behavior?

Reelection rates are almost always greater than 95 percent, and even the huge groundswell / anti-incumbent years return greater than 80 percent of them to office.

So, I ask everyone: why would any rational politician do anything different than politicians have been doing for years?


ACP's picture

Serious negotiations? That must be when Obama dictates what he wants and Boner sits there with his thumb up his retarded ass and says, "Yes, Master!"

redpill's picture

My guess is that the kicked can will be campbell's chicken noodle

CClarity's picture

I'm going with stewed tomatoes

Pairadimes's picture

ALPO Prime Cuts with Beef in Gravy, 13 ounce size. Dinner for two on an austerity budget.

slaughterer's picture

God-man's "guess"?  Didn't they pre-load this already?  (Or something just the opposite?)

fonzannoon's picture

Slaughterer here are the details of my arrangement to be sold to goldman yesterday. Feel free to pass along to sudden debt.

slaughterer's picture

fonzanoon, glad you got a good deal.

I got a nice ranch in Texas and some more Rugers from Goldman for my avatar.  

DoChenRollingBearing's picture

Jim McTague (of Barron's) thinks that it is Obama, Boehner and Senate Minority (Republican) Leader McConnell that are the keys to a deal.  Pelosi and Reid don't count.  McTague says to watch to see if Obama is REALLY interested in a deal, if so, he will stay in DC and talk.  If he goes flying around the country saying his usual crap, then maybe NO DEAL.  Which, IMO, is what Obama probably wants anyway.

Gold is good here...

DavidPierre's picture

The central bank franchise system is broken.

The global monetary system is broken.

The big Western banks are broken.

The financial markets are broken.

The safe savings vehicles are broken.

The all-important confidence factor to support fiat paper currencies is fast vanishing.

The arrival of the Gold Standard as the solution is being slowly manifested in the form of a gold-core trade settlement system, which will drive a global Gold Standard. The new system will dictate bank reserves practices, and render the USTBond as a rejected toxic paper relic.

It will arrive early in 2013.

In the process, the Western nations will become impoverished, as they desperately cling to the failed system.

Anger will rise.

Disorder will prevail.

The USDollars inside the United States will be trapped, then devalued as the public watches in shock. The power will shift East inevitably, with the shipment of Gold.

A new era will begin.

LawsofPhysics's picture

Almost, but not quite, with respect to the U.S. the collapse won't look much different from what the Soviets went through (with some states seceding).

But yes, I will ask for gold in exchange for my soybeans.  How many folks need to be fed in the east again?  Bring it.

blunderdog's picture

Yeah, right, I'm gonna have to go ahead and tell you that that's not going to happen, mmmkay? 

Prediction fail.

youngman's picture

Hey but they fixed Greece again today...

Zap Powerz's picture

My chances of making through the zombie apocalypse are less than 50%.  My chance of taking a lot of zombies out before I go is 100%.  A guy has to remain hopeful and optimistic right?

Joe Davola's picture

Agreed - fiscal cliff gives Obama the tax increases he wants, plus the ability to demagogue the R's for the erstwhile spending "cuts".

earnyermoney's picture

also get's the deep DOD cuts that Dems love.

R's should come out and sell the fiscal cliff as going along with Barry's wishes. They'll take their small bone of across the board spending cuts. Nothing to get excited over. Let's give Barry's ideas a try.

CrashisOptimistic's picture

Dirty little secret:

The Democrats in the Senate up for re-election in 2014 . . . several from red states, are not going to support these tax increases.

Obama won't be able to get these tax jacks through his own caucus.  Several of those Dems will join the Republican Senators voting to continue filibuster.

Orly's picture

Astute politics, CiO...


LawsofPhysics's picture

"Several of those Dems will join the Republican Senators voting for secession". - fixed.

Good observation.  Quite possible.  MS wrote the script for the soviet collapse, and profitted handsomely, why would any of us expect anything different when the collapse is in their own backyard.  Forget about fiat currencies, this is all about power and control of America's remaining resources, including the human kind.

Panafrican Funktron Robot's picture

Obama has to do precisely nothing to get the tax increases through.  It was already passed (by both D's & R's) in the budget control act.  

Goldman is telling the muppets a compromise will happen, but that it will be a "close call".  View that as plausible deniability caveat.  There is no way in fuck we're doing anything but going straight over the cliff.  

odatruf's picture

To be accurate, the coming tax increases were first passed by the GOP held Congress in 2001 and 2003 when they were cut for only ten years. The two year extension was yet more can kicking, not new ground.

marathonman's picture

R's should be ready to drop the economy directly onto Barry's thick statist crony skull.  Give him his tax increases.  Watch the economy contract good and hard and start the big swirly down the US dollar Ponzi toilet.  Bring it you statist assholes.  Fucking bring it.

MiltonFriedmansNightmare's picture

But you forget the R's are statist assholes as well.

mayhem_korner's picture

Pelosi and Reid don't count.


Pelosi and Reid can't count.

fonzannoon's picture

whistling past the graveyard.

francis_sawyer's picture

More horseshit to keep anyone who is not interested in sports or Justin Beiber occupied until the end of the year when they'll have to think of the next thing to keep you distracted with after they come back to work from the next vacation...

inevitablecollapse's picture

$1T - $2T in spending cuts over 10 years, not per year??? what.the.fuck

mayhem_korner's picture



But it SOUNDS like a lot.  And that's the point.

BP paid/is paying something like $4.3B in fines/reparations over their little spill.  That SOUNDS like a lot, until one realises that the Federal government takes 28 hours to run up that much in new, unrepayable debt.

seek's picture

Exactly -- without closing the deficit to zero, we're still adding to the debt, and there's no way to cover the deficit with tax increases alone.

In other words, they're still printing to cover government spending, the interest rates have to remain close to zero to prevent the debt from blowing up the government, and eternal dollar dilution becomes policy. The US is perma-fucked.

so... gold, bitches, as it were.

inevitablecollapse's picture

perma-fucked :: definitely going to adopt this.  

JustObserving's picture

$1T - $2T in spending cuts over 10 years

Debt will rise by at least $15 trillion and unfunded liabilities by $70 trillion in the next decade.  Cutting debt and unfunded liabilities by 1% to 2% is so ambitious.

Bernanke will be printing $1 trillion plus just in 2013.  


mayhem_korner's picture



The resolution (or not, as the case may be) of the "cliff" only has two implications: the rate of speed of the train-wreck and some temporal re-allocation of wealth.  The rest is just NOISE.