The 2013 Fiscal Logjam

Tyler Durden's picture

With the political season heating up, and tax season upon us, we thought it worthwhile drilling into exactly how painful the potential pre-programmed fiscal tightening in 2013 is likely to be. As Credit Suisse notes, "it ain't over til its over" as the suspicion is that a lame duck session of Congress will forestall some of the tightening but until Congress acts, the economy is still technically in a collision course with the largest fiscal hit in modern times.


Credit Suisse: 2013 fiscal logjam

Under current law, fiscal policy in 2013 is pre-programmed to contract sharply absent legislative action. It?s likely that much of the “tightening” will be forestalled in a buzzerbeater lame duck session of Congress. But, to borrow from the great New York Yankee (and New York Mets manager) Yogi Berra: “It ain?t over „til it?s over.” Until Congress acts, (and it?s unlikely it will before the November elections), the economy will still technically be on a collision course with largest fiscal hit in modern times.

We think three groups of provisions are realistically on the table:

1) Extension of the upper-income Bush tax cuts. On this score, we believe the upperincome tax rates, including the top two marginal tax brackets, capital gains tax rates, and dividend tax rates, are the only provisions from the original Bush tax cut program that are realistically in play. Technically, middle income provisions such as extension of the child tax credit, marriage penalty relief, and lower marginal tax brackets, must also be legislatively extended. But allowing a huge and unexpected middle class tax hike to take place on January 1 next year is highly unlikely, in our view. President Obama has said he favors allowing the top two marginal individual rates to move up to where they were in the Clinton years – 36% and 39.6% (from the current 33% and 35%, respectively). He also proposes raising the top long-term capital gains tax rate to 20% (from 15%). And his most recent budget proposes allowing the highest bracket for dividend tax rates to be taxed at ordinary income rates (which would be 39.6%).


2) Lower payroll tax rates and jobless benefit extension. Congress and the president lowered the Social Security payroll tax rate that employees pay by 2 percentage points at the start of 2011, and recently extended that through all of 2012. They also extended unemployment insurance benefits in the same agreement. Like the Bush tax cuts, these are scheduled to lapse as of January 1, 2013.


3) Budget “sequestration”, or the automatic spending cuts scheduled to trigger as part of last year?s Super Committee impasse. Much of this is concentrated in Medicare and defense.

How large is the potential fiscal drag?

Exhibit 3 above  shows the change in the cyclically adjusted federal budget balance as calculated by CBO, which captures the change in fiscal policy not associated with changes in the economy (such as faster GDP leading to more tax revenue).

In the Exhibit below, we show three scenarios for fiscal year 2013.


1) A “low” scenario, which assumes the items mentioned above are extended or postponed. This results in fiscal tightening of about -0.9% of GDP. Other polices aside from the ones mentioned above are scheduled to tighten policy moderately next year, such as expiration of some “Recovery Act” stimulus measures, and a rise in Medicare payroll taxes earmarked for the funding of “Obamacare.” Note that fiscal drag of this size is relatively routine, and would not be expected to have a significant impact on the outlook.


2) A “high” scenario, which assumes all three measures we discuss are allowed to kick in. This results in an overall 2.4% fiscal drag during fiscal year 2013, a much more significant hit.


3) A “current law cliff” scenario worth 4% of GDP, which we consider unlikely. This includes not only allowing the three measures we cite above to phase in, but also assumes other items which are routinely enacted every year don?t occur, such as passage of the AMT “patch” and the Medicare “Doc Fix”. It also assumes the middle class portion of the Bush tax cuts are allowed to expire (again, unlikely).

As for what will happen, a lot will depend on which party emerges victorious in November, and how decisive the outcome turns out to be. Our Washington team believes the most likely outcome is something akin to scenario (1), essentially “a kick the can down the road” outcome, as there won?t be enough time or political will to deal with big changes to policy in the lame duck session of Congress.

We would also note that the analysis above is “federal-only.” Another ½ ppt. (more?) of additional fiscal drag is likely from cuts to the budgets of states and localities.

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fonzannoon's picture

Come on...The tax cuts will be extended. The automatic cuts will be deferred at best and eliminated most likely. Sure debt will explode but it is already 15 TRILLION and NOBODY CARES. The ratings agencies will be dismantled before they have a chance to actually have any say about it. It's on now.

mayhem_korner's picture



I'm not so sure the tax cuts will be extended in perpetuity.  Remember that the narrative is things are recovering.

fonzannoon's picture

fair enough I will grant you that. The 250k crowd may get beat up. I am basing this on GDP coming in at 2% if they are lucky for this year.


CrashisOptimistic's picture

That's actually a very good point.

Sure, we all know those fucking maniacs will undo the spending cuts and defer the tax increases, and come November we'll be at 16T, not 15T -- with January well on its way to 17T, to get there sooner with what Congress agrees to do.  Sure we know that.

But the ratings agencies do loom out there.  They put off taking action because the debt ceiling deal promised to do shit.  Now, when Congress decides to undo that promise, the agencies have to act.

OTOH, let's note the 10 year treasury was at 2.57% on Aug 6, the day S&P cut the US below AAA.  It's 2.16% now.  Ratings cuts drive yields lower, I guess, because they are all fucking insane.

fonzannoon's picture

True regarding OTOH but look who is buying the FRN

SheepDog-One's picture

Lunatics in charge of the asylum.

mayhem_korner's picture



The asylum has no walls, mon ami.

CrashisOptimistic's picture

This article left out two things.

Unemployment benefits extension policies also expire 1 Jan

Also, the debt ceiling deal had two parts of cuts.  Sequester and immediate 900B spaced over 9 yrs.  $4B was cut in 2012.  2013 gets about 100B cut.

mayhem_korner's picture

This article left out two things.


Therefore...death by 998 paper cuts?

CrashisOptimistic's picture

No, not at all.  It left out two items of additional fiscal contraction scheduled for 1 January.  Period.

fonzannoon's picture

Silver is prforming interesting today, no?

SheepDog-One's picture

All just a bunch of BS picking fly shit out of pepper....$5 gas will derail all this nonsense early this summer.

earleflorida's picture

again,... will we ever learn [?] - the sheeple have been dumbed-down for generations

i can remember not so long ago when we almost had an 'energy-program', but Cheney hijacked it - bringing it to the supreme court, and there it has been remained sealed forever [Iraq and no-bid contracts for Halliburton, and of course the Bushies oil interest] - the untimely [timely?] 'gulf-oil-spill', where Halliburton had its footprint [surprising how BP has recuperated all its losses and is extremely profitable as i write?] ,but again no press. 

no energy program - no future, period! all the talk of balancing budgets is meaningless unless we have the profound, and 'God' willing ability to control our own destiny! Yes, national security should be in the independence equation as a no-brainer, also!

Reference - Remember -Resolve [the three "R's"] :   [* scroll to 2004]

Ps. this will effect the outcome of future wars, or perhaps the countries destiny


Sudden Debt's picture

As Credit Suisse notes, "it ain't over til its over" .....

I think it was the fat lady who said that... But that could be about 90% of every german or american woman so I won't bitch about to much....

q99x2's picture

Time for a Technocrat as prime minister of the US. He can run the Super Congress.

metaforge's picture

Lots of black swans swimming around out there.

theprofromdover's picture

It ain't over til the fat lady sinks.