Master US Fiscal Cliff Primer PresentationPresentation Transcript
Image page U.S. Fiscal Cliff and Debt Primer Bloomberg BRIEF: Economics Joseph Brusuelas December 2012
U.S. Fiscal Cliff and Debt PrimerExecutive Summary • Expiring tax and expenditure policies if not addressed with likely trigger a US recession in early 2013. • Policymakers have not moved significantly toward resolving differences over fiscal policy, setting stage for fiscal shock in early 2013 • Due to liquidity constraint in economy end of tax holiday or tax cuts likely to have greater impact than generally acknowledged • Federal Reserve will likely resume treasury purchases in advance of economy hitting cliff at December 2012 meeting.Subscribe @ Brief <GO> 2
U.S. Fiscal Cliff and Debt PrimerExecutive Summary • Negative growth rates of -3.1 percent in 2013 in contrast to the Bloomberg consensus forecast of a 2 percent rate of growth. • Personal Consumption • End of Bush tax cuts reduces household expenditures by $200 billion or roughly 1.3 percent of GDP. • End of Obama tax holiday reduces personal spending by $95 billion, subtracting 0.6 percent from overall output. • Assuming multiplier of 0.75% • Larger multiplier results in greater hit on consumption and growthSubscribe @ Brief <GO> 3
U.S. Fiscal Cliff and Debt PrimerEstimated Effects of Fiscal Tightening Potential Increase in 2013 U.S. Real GDP by Eliminating Mandated Spending Cuts and Extending Tax Provisions 3.5% 2.9% Percentage Point Change in Baseline GDP 3.0% 2.5% 2.0% 1.5% 1.4% 1.0% 0.7% 0.5% 0.4% 0.4% 0.0% Defense Spending Cuts Non-Defense Spending Bush-Era Tax Breaks Payroll Tax Holiday Total Potential Increase Cuts in GDP Source: CBO Mid-Point Projections, November 2012, BloombergSubscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 4
U.S. Fiscal Cliff and Debt PrimerEstimated Effects of Fiscal Tightening Comparison of Potential Increase in 2013 U.S. Real GDP by Extending Tax Provisions 3.5% 3.0% Percentage Point Change in Baseline GDP Little Difference in GDP Growth by Not Extending Tax Breaks to Upper Income Households 2.5% 2.0% 1.5% 1.4% 1.3% 1.0% 0.7% 0.5% 0.0% Extend Payroll Tax Holiday Extend Tax Breaks for Incomes <$250,000 Extend Most Bush-Era Tax Breaks Source: CBO Mid-Point Projections, November 2012, BloombergSubscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 5
U.S. Fiscal Cliff and Debt PrimerImage page Executive Summary • Unemployment likely to reach 9 percent by mid 2013 • Sequestration to hit public sector and defense related jobs hardest • Private sector already pushing back hiring and reducing investment. • If economy hits cliff, private firms will be aggressive in shedding jobs in Q1’13. • Debt Ceiling • December 15 • US Treasury announced it will take technical steps to extend point at which the Federal Government exhausts funds until late February or early March. Subscribe @ Brief <GO> 6
U.S. Fiscal Cliff and Debt PrimerRepeat of 2011 Debt Ceiling Debate Looming U.S. Debt Quickly Approaching Ceiling $18 $0.0 $16 -$0.4 $14 -$0.8 $12 Room Remaining, tln (rs) $10 U.S. Public Debt Subject to Limit, tln (ls) -$1.2 U.S. Statutory Debt Limit, tln (ls) $8 -$1.6 $6 $4 -$2.0 1995 1998 2001 2004 2007 2010 2013 Source: BloombergSubscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 7
U.S. Fiscal Cliff and Debt PrimerFiscal Multiplier • Understanding Multipliers • A multiplier of zero means that an exogenous change in income will have no effect on GDP growth. • A multiplier of one indicates that a change in income will result in a one-for-one change in GDP. • A multiplier greater than one means that GDP will change by more than the exogenous change in income. Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 8
U.S. Fiscal Cliff and Debt PrimerFiscal Multipliers • The estimation of the impact of fiscal multipliers among economists remains an intensely debated topic. • Under current economic conditions estimation of multipliers suggest serious risk of weaker pace of consumption, negative growth and rising unemployment. • Consumer Behavior • Save lump sum tax rebates • Spend income related to Bush cuts and Obama tax holiday • Lower income groups take much larger hit • Liquidity constraints suggest likely larger multiplier effects • Impaired credit system • 13 million mortgages with negative equity or near negative equity • Consumers rapidly drawing down savings • Sluggish wage growth and falling earnings Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 11
U.S. Fiscal Cliff and Debt PrimerConsumers Not Well Prepared for Decline in After Tax Income U.S. Household Savings Has Declined along with Wages 14 10 9 12 8 Avg. Hourly Earnings (yoy %) (smo.) 10 7 Savings Rate (%) (smo.) 6 8 5 6 4 4 3 2 2 U.S. Savings Rate (%) Average Hourly Earnings (yoy %) 1 0 0 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Source: US Bureau of Economic Analysis; Bloomberg PIDSDPS, USHEYOY INDEX <GO>Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 12
U.S. Fiscal Cliff and Debt PrimerConsumers Not Well Prepared for Decline in After Tax Income U.S. Consumer Credit Growth Remains Below Average Year-over-Year Percent Change in Total Consumer Credit Outstanding 25 20 15 Total HH Credit (yoy %) 10 5 0 -5 -10 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Source: Bloomberg CCOSYOY INDEX <GO>Subscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 13
U.S. Fiscal Cliff and Debt PrimerEconomic Efficiencies Efficiency of Eliminating Mandated Spending Cuts and Extending Tax Provisions (Relative to Budgetary Costs in 2013) 1.4 1.2 1.2 Dollar of GDP per Budgetary Costs 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.2 0.0 Defense Spending Cuts Non-Defense Spending Bush-Era Tax Breaks Payroll Tax Holiday Total Potential Increase Cuts in GDP Source: CBO Mid-Point Projections, November 2012, BloombergSubscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 14
U.S. Fiscal Cliff and Debt PrimerPercentage Point Change in the Real GDP Growth Rate (from the BaselineEstimates) Under Elimination of Bush-Era Tax Cuts Lower Income Multiplier Upper Income Multiplier 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 0.00 0.0% -0.3% -0.6% -0.8% -1.1% -1.4% -1.7% -2.0% 0.25 -0.1% -0.3% -0.6% -0.9% -1.2% -1.5% -1.8% -2.0% 0.50 -0.1% -0.4% -0.7% -1.0% -1.3% -1.5% -1.8% -2.1% 0.75 -0.2% -0.5% -0.8% -1.0% -1.3% -1.6% -1.9% -2.2% 1.00 -0.3% -0.5% -0.8% -1.1% -1.4% -1.7% -2.0% -2.2% 1.25 -0.3% -0.6% -0.9% -1.2% -1.5% -1.7% -2.0% -2.3% 1.50 -0.4% -0.7% -1.0% -1.2% -1.5% -1.8% -2.1% -2.4% 1.75 -0.5% -0.7% -1.0% -1.3% -1.6% -1.9% -2.2% -2.4% Email jbrusuelas3@bloomberg.net orSubscribe @ Brief <GO> call 212-617-7664 16
U.S. Fiscal Cliff and Debt PrimerEconomic Efficiencies Comparison of Potential Increase in 2013 U.S. Real GDP by Extending Tax Provisions 1.4 Extending Tax Breaks to Upper Income Households Is Least Efficient in Generating GDP Growth 1.2 Percentage Point Change in Baseline GDP 1.0 0.8 0.7 0.6 0.6 0.5 0.4 0.2 0.0 Extend Payroll Tax Holiday Extend Tax Breaks for Incomes <$250,000 Extend Most Bush-Era Tax Breaks Source: CBO Mid-Point Projections, November 2012, BloombergSubscribe @ Brief <GO> Email jbrusuelas3@bloomberg.net or call 212-617-7664 17
U.S. Fiscal Cliff and Debt PrimerBGOV: Automatic Sequestration • Office of Management and Budget will instruct federal government agencies to cut $103.9 billion from budgets. • $54.7 billion from non-defense discretionary and entitlement programs including Medicare • Total non-defense discretionary spending cut by 8.2 percent. • $54.7 billion from the Pentagon and other defense related programs. • Defense outlays reduced by 9.4 percent. • Agencies likely to delay cuts until late February or early March in hopes that an agreement can be reached. • If sequestration occurs roughly half the cuts will occur in 2014 extending fiscal drag over next two years. • If sequestration is implemented under current law it will continue through 2021 in the form of budget caps. Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 18
U.S. Fiscal Cliff and Debt PrimerImage page Deficit and Debt Dynamics • Longer Term Policy Tradeoffs Demand Near Term Action • US Federal debt to GDP ratio stands at 101 percent. • Period of fiscal restraint necessary • Periods with greater investment as a share of GDP are highly correlated with faster growth and rising living standards • One risk, among many, to the U.S. economy is that rising entitlement spending will require the government to borrow a finite amount of capital from private savers, squeezing out private firms who need that capital to expand the businesses and increase productivity. Subscribe @ Brief <GO> 21
U.S. Fiscal Cliff and Debt PrimerDeficit Dynamics Fiscal Cliff and Long Run Implications for US Deficit 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 -200 -400 U.S. Deficit ($ Billions) -600 -800 -1000 Increased debt service Maintain Medicare Rates -1200 Avoid Sequestration Extend Other Tax Breaks -1400 Extend Income Tax Breaks Baseline Deficit -1600 Source: Congressional Budget Office Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 22
U.S. Fiscal Cliff and Debt PrimerDebt Dynamics US Total Public Debt as Percentage of Nominal GDP 120 110 100 90 80 Percentage 70 60 50 40 30 20 10 1981 1986 1991 1996 2001 2006 2011 Source: Bloomberg Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 23
U.S. Fiscal Cliff and Debt PrimerImage page Debt Dynamics • Longer Term Policy Tradeoffs Demand Near Term Action • U.S. federal spending on mandatory entitlements will likely increase from $2 trillion in 2012, to $2.8 trillion in 2017. • Spending on entitlements as a share of GDP increased from 4.9 percent in 1962 to an estimated 13.5 percent in 2012. In contrast net fixed business investment will probably decline to 1.7 percent in 2012, down from 3 percent in 1962 Subscribe @ Brief <GO> 24
U.S. Fiscal Cliff and Debt PrimerEntitlement Spending vs. Net Fixed Business Investment 16 Net Business Fixed Investment Mandatory Entitlement Spending Actual Forecast 14 12 Spending as a Percentage of GDP 10 8 6 4 2 0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022 Source: Bloomberg, CBO Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 25
U.S. Fiscal Cliff and Debt PrimerImage page Debt Dynamics • Longer Term Policy Tradeoffs Demand Near Term Action • Over time the spread between net fixed business investment and mandatory outlays has widened. • Continuing on this path will result in reduced productivity levels, slower growth, higher unemployment and an overall lower standard of living. • Between 1967 and 2011 the difference between spending as a percentage of GDP in net business fixed investment has increased from 0.7 to 12 percent. • During the five years prior the spread was 0.92 Subscribe @ Brief <GO> 26
U.S. Fiscal Cliff and Debt PrimerThe Fiscal Path and U.S. Debt Debt Dynamics a Risk to Fiscal Sustainability 1.6 Nominal GDP Growth Annual Growth in Federal Debt 1.4 1.2 1 Annual Growth (Trillions) 0.8 0.6 0.4 0.2 0 -0.2 -0.4 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: Bloomberg Email jbrusuelas3@bloomberg.net or call 212-617-Subscribe @ Brief <GO> 7664 27
U.S. Fiscal Cliff and Debt PrimerImage page Debt Dynamics • Stabilizing Debt to GDP Ratio at 101 Percent • Nominal GDP of 3.9 percent. • Long term borrowing costs of 1.5 percent. • US can run primary budget deficit of 3 percent. • Stabilizing debt to GDP at current elevated levels. • Debt and Deficit Dynamics • Running $1.3 trillion dollar deficits while economy adds roughly $600 billion on nominal basis is not sustainable. Subscribe @ Brief <GO> 28
Bloomberg Joseph Brusuelas, Senior Economist Bloomberg, LP jbrusuelas3@bloomberg.net Joseph Brusuelas is an analyst who writes for the Bloomberg Economic Brief. The observations he makes are his own. Bloomberg is a leading source of data, news, and analytics for financial and legal professionals, corporations, media organizations and private individuals around the globe. The BLOOMBERG PROFESSIONAL® service and Bloomberg’s media services provide real-time and historical pricing, indicative data, reporting, research, estimates, analytics, portfolio management tools, electronic trading and order management systems, multimedia events and electronic communications to Bloomberg clients in more than 150 countries, 24 hours a day. bloomberg.com Frankfurt London San Francisco Singapore Tokyo +49 69 9204 1210 +44 20 7330 7500 +1 415 912 2960 +65 6212 1000 +81 3 3201 8900 Hong Kong New York São Paulo Sydney +852 2977 6000 +1 212 318 2000 +55 11 3048 4500 +61 2 9777 8600The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the "Services") are owned and distributed locally by Bloomberg Finance L.P. ("BFLP") and itssubsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg L.P. ("BLP"). BLP provides BFLP with allglobal marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic tradingand order-routing services, which are available only to sophisticated institutional investors and only where the necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provideinvestment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG,BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION,BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries.
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