Advance Look At This Week's DC Melodrama

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A busy week in Beltway theater melodrama. Goldman summarizes what to expect below as the President's deficit reduction package goes to the Hill today; later this week the super committee meets, and Congress enacts stopgap funding for the new fiscal year...

Monday, September 19

10:30 am – President speaks on deficit reduction proposal. The headline numbers came out over the weekend: $1.5 trillion in tax increases, $1.1 trillion from withdrawing troops from Iraq and Afghanistan, $320bn from health spending cuts, and $260bn from other non-health programs outside of congressional appropriations (agricultural subsidies, federal employee benefits, etc). The remainder would come from interest savings that result from those changes.  While the tax proposals are new, much of the remainder has roots in the earlier discussions on the debt limit in June and July.  The amounts of health and non-health mandatory savings look similar to those in the Biden-Cantor talks that took place ahead of the debt limit, though the distribution probably differs, particularly given the likelihood that the President will propose pharmaceutical cost control measures (rebates, etc) that Republicans in Congress have generally opposed.  The use of savings from withdrawal from Iraq and Afghanistan was also proposed by Senate Majority Leader Reid (D-NV) in the earlier debt limit debate, to take advantage of the fact that the official budget baseline projections assume spending will continue at the current rate for the next ten years.  On the tax side, $800bn appears to come from allowing the upper-income portions of the 2001/2003 tax cuts to expire, roughly $400bn from the limitation on itemized deductions for high income earners that the President proposed last week to offset the budgetary effects of his jobs plan,  and the remainder from a variety of other tax provisions including a new minimum tax individuals with more than $1mn in annual income.  This will probably be proposed along with a call for comprehensive tax reform, but without specifics.

Tuesday, September 20

  • Disposal of foreclosed properties.  The Senate Banking Committee will hear from the homebuilders and realtors on how to address the glut of foreclosed properties.  FHFA has been taking comments from industry on how to manage the GSEs’ REO inventory, and its plan seems likely to be an important part of the overall strategy.

Wednesday, September 21

  • House likely to pass continuing resolution to fund government operations through Nov. 18.  The fiscal year begins October 1, but Congress has not yet managed to enact any of the annual spending bills to fund the various operations of government. The plan is, as usual, to pass a continuing resolution to provide stopgap financing while the longer-term legislation is passed and enacted. In this case, funding will run through November 18, with the idea that the next deadline would come around the same time that the deficit “super committee” will finalize its legislation (it has a Nov. 23 deadline).   Although the funding level has been resolved – the Budget Control Act to extend the debt limit took care of that by capping FY2012 appropriations – the question of how much disaster aid to include, and whether to offset its cost, has not been.  In theory, if this disagreement persists past October 1, the threat of government shutdown could return, but neither political party seems interested in getting into a debate over a shutdown at this point.
  • FOMC -- We expect that the FOMC will announce a change in the composition of its balance sheet—what has been dubbed a new “operation twist”—and a cut in the interest on excess reserves (IOER) rate at the meeting.  The “twist” seems widely expected but an IOER cut could surprise markets.

Thursday, September 22

  • Joint Select Committee on Deficit Reduction meets. The topic for this meeting will be  tax reform.  Tax reform will be next to impossible to enact as part of the super committee’s legislation, but there is at least a possibility that the legislation will set up a process to consider tax reform as a standalone issue in the near future. 
  • Alan Krueger testifies before Senate Banking Committee. Krueger has been nominated to head the Council of Economic Advisors.  A good portion of this hearing is likely to focus on the president’s jobs plan.
  • Republican presidential debate.  In Orlando, FL.  Texas Governor Rick Perry still leads the polls for the Republican nomination by an average of 10 points, but his ascent has stopped, and former Mass. governor Mitt Romney has started to regain some ground

Source: Goldman Sachs