Fiscal Cliff To Be Fiscal Drag Amounting To 1% Of 2013 GDP

JPM's Michael Feroli, who already quantified the impact of the 2% payroll tax cut expiration at $125 billion, has estimated the impact of the Fiscal Cliff on the US economy for 2012. The verdict: 1%. This is just on the Obama tax [cut|hike]. If and when any spending cuts are actually announced or enacted, this number will only go up, as will apparently the market.

From JPM's Michael Feroli:

The Senate-passed budget deal is broadly in line with our prior fiscal cliff expectations, which is to say a resolution which imposes considerable near-term headwinds to growth while doing very little to address longer-run fiscal sustainability issues. The table below summarizes our current assessment of the fiscal drag associated with fiscal-cliff-related measures, which we still see subtracting about 1%-point from GDP growth in 2013.


The heart of the deal is the extension of lower- and middle-income Bush tax rates combined with a variety of rate and non-rate upper-income tax increases. Relative to current policy, those upper-income measures are projected to raise revenue by $624 billion over a ten-year horizon. By comparison, under current policy (the CBO's "Alternative Fiscal Scenario") deficits over that period should amount to $9.975 trillion, and so the upper-income revenue increases should close about 6% of the ten-year budget gap. Beyond the ten-year horizon the contribution to sustainability is equally minimal (see "The ten-year mirage" on morganmarkets).


As expected, the payroll tax holiday was allowed to lapse on schedule. Moreover, Emergency Unemployment Compensation was extended for another year. The sequestration associated with the Budget Control Act was deferred for two months. The fate of these across-the-board budget cuts come March remains uncertain. This uncertainty, combined with the unresolved fate of the debt ceiling, probably curtails any "certainty bounce" in confidence that would be expected with the resolution of the fiscal cliff.