Timeline Of Fiscal Catalysts In The Second Half Of 2011 And After

Now that Ben Bernanke has made it clear that monetary intervention is on hold (supposedly...at least according to the FOMC minutes; what happens at Jackson Hole is not so clear), that monetary stimulus is on hiatus (if one can call a 2 year ZIRP extension and duration cut hiatus), the economic renaissance ball is deep in the court of fiscal policy. But unlike the Fed, where events by now are so finely and quantitatively nuanced courtesy of the the If=>Then logic of the Fed (no matter how troubled or failed), with the economy now in the hands of politicians, this more than anything could be a reason for everyone to really panic. That said, below is a blueprint of what Congress is "supposed" to doto not throw the economy into a tailspin, and also what it has to do to avoid a repeat of the debt ceiling fiasco once again (which as everyone knows by now buys $2.4 trillion in deficit funding in exchange for $22 billion in deficit cuts).

From Goldman Sachs

The Fiscal Timeline for the Second Half of 2011 and Beyond

This week's appointment of members of Congress to the Select Joint Committee on Deficit Reduction (referred to by many as the "Super Committee") will be only the first of several developments related to fiscal policy over the coming weeks and months. Most of the upcoming activity is likely to relate either directly or indirectly to the recently enacted Budget Control Act (BCA), which cut spending, raised the debt limit, and instructs a Super Committee to develop additional proposals to save $1.2 trillion over ten years, to be voted on by Congress before year end. However, Congress still faces the expiration of the payroll tax cut enacted in late 2010, and emergency unemployment compensation (EUC), both of which are set to expire at year end. What follows is our annotated timeline of upcoming fiscal events over the rest of this year, as well as a few selected events in 2012:

Mid-August: Super Committee selections. House and Senate leaders had until August 16 to announce their appointments to the Super Committee but finished this stage of the process a few days early. Over the last few days, Senate leaders have appointed their members, as has House Republican leadership. House Minority Leader Pelosi announced her choices today, completing the first stage of the process. There has been a good deal of commentary in the media on what the composition of members might mean for the likelihood of a compromise, but while the individual members of the committee will play a role in shaping the agreement, it seems likely that major decisions will be heavily influenced by congressional leadership just as the fiscal debates up to this point have been. That said, it is worth noting the chairmen of the Senate Finance, House Ways and Means, and House Energy and Commerce Committees have been appointed to the Super Committee. Collectively they oversee tax policy and most entitlement spending in both chambers of Congress. This should allow for greater coordination between the Super Committee and the members of Congress and their staff with expertise in the areas of the budget most likely to be targeted for savings.

Late August: CBO and OMB budget updates. The Congressional Budget Office (CBO) usually releases its mid-year Economic and Budget Outlook report in late August. CBO's update is likely to include a lower projected deficit for FY2011 than the $1.399 trillion it last projected in March (we forecast a deficit of $1.275 trillion for FY2011). The White House Office of Management and Budget (OMB) is well past its soft deadline of July 15 for releasing its Mid-Session Review (MSR). The administration has projected a much higher deficit for FY2011 of $1.645 trillion (10.9% of GDP), which is likely to come down in the MSR, though the risk to OMB's FY2012 deficit projection of $1.1 trillion is to the upside. The budget numbers may also reflect new economic proposals, discussed below.

Late August/Early September: The White House unveils new fiscal proposals? Congress returns from recess on September 6. Around this time, the President is likely to unveil new economic proposals dealing with job creation and deficit reduction. This could happen as part of the MSR release, noted above. It could also in some cases occur independently. The President and other administration officials have indicated on several occasions over the last two weeks that new proposals will be forthcoming over the "weeks ahead." The administration has solicited ideas on how to manage properties that Fannie Mae, Freddie Mac, and the FHA have acquired through foreclosure, and it is possible that other housing-related measures could be in the offing. In addition to the payroll tax cut extension that the administration has continued to press for, it is possible that the President could also unveil additional measures meant to stimulate hiring or investment (he took a small step in this direction last week with a proposed tax credit for the hiring of veterans). Proposals requiring congressional approval look most likely to be addressed in the Super Committee process.

September 16: Super Committee process begins. The committee must hold its first meeting on or before this date. We suspect the committee's activity won't become intense until October.

September 21: Symbolic debt limit vote. The President activated the first $900 billion installment of new borrowing capacity with a submission to Congress on August 2, the day he signed the BCA into law. $400bn of that increased capacity takes effect immediately. Congress has 50 days from the date of that announcement (August 2) to pass a resolution of disapproval to rescind the $500bn in borrowing authority remaining in the first installment. However, if Congress passed such a resolution, the president would surely veto it, in our view. Since it is very likely that Congress would not have the two-thirds support in both chambers to override a veto, the entire exercise would be symbolic.

October 1: Fiscal Year (FY) 2012 begins. The House has passed most of its appropriations bills for the coming fiscal year, but at a level lower than the spending cap that was agreed to in the legislation enacted last week. The Senate has not yet passed any appropriations legislation. If appropriations legislation is not passed by October 1, most agencies will be funded through temporary stopgap measures known as continuing resolutions. In theory, disagreement over the level of funding for FY2012 could prompt renewed fears of a government shutdown similar to the debate that occurred in early April of this year. However, in light of the fact that Congress just agreed to cap congressional appropriations at $1.043 trillion for the coming year, it is more likely that stopgap funding will be provided at the same level as the recently agreed to caps, reducing the risk of a shutdown.

October 1 to December 31: By December 31, the House and the Senate must both vote on a Balanced Budget Amendment (BBA) to the Constitution. Adopting a constitutional amendment requires a two-thirds vote in both chambers, and the BBA is unlikely to get this, particularly in the Senate. If by chance Congress actually adopted a BBA, it would still require ratification by three quarters of the states, which would probably take several years and might not occur at all.

October 14: Relevant committees may send recommendations to the Super Committee. Whether this will actually occur is unclear, since (1) proposals to cut spending or raise taxes are usually unpopular, and some committee chairs may be disinclined to submit recommendations that the Super Committee is not compelled to accept in any case, and (2) most of the potential deficit reduction measures that are not related to congressional appropriations (appropriations were dealt with through the discretionary spending caps enacted in the BCA) are under the jurisdiction of the House Ways and Means, House Energy and Commerce, and Senate Finance Committees, and the chairmen of all three will serve on the Super Committee.

November 23: The deadline for Super Committee approval. In order to forward legislation to Congress for expedited consideration, a majority of the Super Committee (i.e., 7 of the 12 members) must vote for it. While the outlook for this process is still very uncertain, we expect a majority of the group to agree on recommendations and for those to be submitted and passed by Congress. This is because (1) there is great pressure on incumbent politicians to demonstrate that the political process can function, and stalemate in the committee could have negative political consequences for both parties; (2) last week's S&P downgrade of the US sovereign rating has not changed most politicians' basic policy positions but it has nevertheless added pressure on the committee to reach agreement, and (3) failure to reach agreement triggers automatic spending cuts (or "sequesters," as they are known inside the beltway) that take effect in 2013 that both political parties would like to avoid.

That said, reaching an agreement does not necessarily mean agreeing on the full targeted savings of $1.5 trillion, because if the committee agrees to a lower figure, the savings it does manage to achieve will reduce the size of the automatic spending cuts that take effect in 2013. Given this, there is a high probability that the Super Committee will be able to agree on a few hundred billion in spending cuts, but it is less likely that it will reach its $1.5 trillion target or even the $1.2 trillion minimum goal needed to avoid any of the automatic spending cuts from taking effect in 2013. In the recent negotiations leading up to the debt limit agreement, both parties looked ready to compromise on $400bn or so of cuts to Medicare, Medicaid, and a variety of mandatory spending unrelated to health care (for example, changes to agricultural subsidies, federal pensions, and Fannie Mae and Freddie Mac guarantee fees). Cuts along these lines seem likely, with some additional provisions possible; switching federal programs to a chained CPI could save as much as $300bn more, for instance. But to go beyond this would probably mean cutting Medicare or other entitlement programs (and perhaps targeting a few tax expenditures) in order to spare defense and non-defense appropriations from cuts in 2013. As the savings agreed to by the committee begin to mount--probably well before the committee reaches $1.2 trillion in savings--lawmakers may opt either to let the automatic cuts do the rest of their work for them (perhaps with the thought that they will return to the issue before cuts take effect in early 2013) or they might decide to replace what remains of the front-loaded automatic cut with a back-loaded cut to the same general areas.

The November 23 deadline will also be important because inclusion in the Super Committee's recommendations appears to be the most likely avenue for enactment of new economic stimulus measures and/or extension of existing measures like the payroll tax cut and EUC, since it will be easier to offset the cost of the bill with other deficit reduction measures as part of this process than in standalone legislation. Thus, a successful committee process actually reduces the likelihood of additional fiscal contraction in the next two years, since it would increase the likelihood of a payroll tax cut extension for 2012 and would probably reduce the size of automatic spending cuts in 2013.
December 9-23: Congress votes on the Super Committee recommendations. If the committee is able to reach agreement and approves legislation for Congress to consider, the BCA lays out a timeline that effectively means that the legislation would not be ready for consideration by the full House or Senate until as late as December 9. The BCA lays out an expedited process for considering the legislation from the Super Committee, involving a simple majority vote in both chambers by December 23, with no amendments allowed to the bill.
December: Another debt ceiling increase. In order to activate the final $1.2 trillion installment of the debt limit increase under the BCA, the President must once again certify to Congress that the debt subject to limit is within $100bn of the limit. This seems likely to occur by December. This would set up another symbolic vote on a resolution of disapproval.

December 31: Payroll tax cut and emergency unemployment compensation (EUC) expire. Our forecast assumes extension of the payroll tax (worth $110bn per year) but not EUC (worth roughly $45bn per year). As noted above, the best shot for extending these measures is inclusion in the Super Committee proposal.

January 15, 2012: Deadline for enactment of the Super Committee legislation. The President must sign the Super Committee's legislation into law by January 15 to avoid automatic spending cuts.

October 1, 2012: FY2013 begins. The BCA limits FY2013 appropriations to $1.047 trillion, an 0.4% increase over the FY2012 level.
November 6, 2012: Presidential election.

December 2012/January 2013: Borrowing capacity exhausted? One of the interesting aspects of the BCA is that it increases the Treasury's borrowing limit by a greater amount if the Super Committee surpasses its minimum goal. If $1.2 trillion in savings is achieved, the total debt limit increase amounts to $2.1 trillion, which is likely to last until December 2012 or January 2013. On the other hand, if the committee is able to agree on $1.5 trillion or more in savings, the debt limit increase would total $2.4 trillion, with commensurate adjustment to the debt limit increase if the committee proposal that comes in between those two amounts. The upshot is that if the committee proposal saves $1.2 trillion or less, the next vote to increase the debt limit could coincide with debate over extending the 2001/2003 tax cuts and the automatic spending cuts called for under the BCA.

December 31, 2012: 2001/2003 tax cuts scheduled to expire. Our budget projections assume that the upper income portions of the 2001/2003 tax cuts will expire after 2012, but that the rest will be extended through the end of the decade. The former is worth roughly $700bn over the next ten fiscal years, the latter is worth roughly $3.1 trillion. However, there is a great deal of uncertainty regarding how these provisions will be dealt with, since this issue is unlikely to be settled until after the election (in a lame duck session of Congress in late 2012, or even potentially in early 2013) and because the issue could potentially interact with debate over another debt limit increase and/or congressional intervention in the automatic spending cuts that might take place at the start of 2013.

January 3, 2013: Automatic spending cuts take effect? If the Super Committee is unable to agree on at least $1.2 trillion in savings (including associated interest savings), or its recommendations are not enacted, defense and non-defense appropriations would be cut further from the already-reduced levels called for under the BCA's spending caps. In addition, Medicare and a few other mandatory spending programs--but not Medicaid, Social Security, or most low-income programs--would face across the board spending cuts. If the Super Committee were to fail to achieve any savings, the automatic cut would work out to $109bn from early 2013 (the actual effect on outlays in 2013 would be slightly smaller as some cuts take time to phase in).