The US budget deal reached in late 2013 increases discretionary spending marginally over 2014-2015 but does not address rising mandatory spending or the long-term fiscal challenges. While avoiding another government shutdown, the budget deal is unlikely to significantly impact weak economic growth or change the long-term fiscal outlook according to QNB Group. As entitlement programs are projected to rise significantly, reducing future deficits will require tackling health and social security costs not addressed in the current budget agreement.

1.
QNB Economics
economics@qnb.com.qa
December 22, 2013
Weekly Commentary
Budget Deal Does Not Change Long-Term US Fiscal Outlook,
According to QNB Group
The US Congress approved a two–year budget
deal last week, further avoiding the specter of
another government shutdown. While this marks
a positive step by lifting a cloud hanging over the
world’s largest economy, it does not tackle the
challenges of the US long-term fiscal outlook.
The budget deal in fact only increases
discretionary spending marginally in 2014-15
without addressing the long-term rise in
nondiscretionary spending, like Medicaid,
Medicare,
Social
Security
and
interest
payments. According to QNB Group, this budget
deal is unlikely to change the overall long-term
fiscal outlook and does not alter QNB Group’s
forecast for US economic growth of 1.5% in
2014.
Following the collapse of a bipartisan
commission in 2011 to tackle the large fiscal
deficit, a large reduction in government spending
(the
so-called
“sequestration”)
became
mandatory on March 1, 2013. This led to a
significant fall in government spending, which
has negatively impacted US economic growth
this year. Democrats and Republicans failed to
reach an agreement on the 2014 US budget last
September, which led to a partial government
shutdown for 16 days in October. A further
mandatory
sequestration
of
government
spending would have taken place on January 1,
2014.
The budget deal reached last week between
Democrats and Republicans restores a small
amount of government spending that would have
been cut under the sequestration. The deal
marginally increases discretionary spending—
the part of federal spending that is not subject to
health and social security entitlements or interest
payments. According to the US Housing Budget
Committee, the budget deal restores USD45bn
of discretionary spending in 2014 and USD18bn
in 2015 that would otherwise have been cut from
the US budget. This USD63bn cumulative rise in
discretionary spending levels only represents
0.3% of GDP, which is unlikely to make a
significant difference to the already weak US
economic outlook. Most of this increase will be
funded through higher airline passenger fees
and other taxes.
US Federal Spending (2011-23)
(% of GDP)
26
A ctual
P rojected
24
Budget
Deal
22
Discretionary
Spending
Nondiscretionary
Spending
20
18
16
14
12
10
2011
2013
2015f
2017f
2019f
2021f
2023f
Sources: US Housing Budget Committee, Congressional Budget
Office, International Monetary Fund (IMF) and QNB Group analysis
and forecasts
The main benefit of this budget deal is that it
avoids another government shutdown over the
next two years. The deal will increase
discretionary spending in the short-term, easing
the pain of sequestration. However, the budget
deal keeps government spending lower than
envisaged before the sequestration, which will
lead to an additional drag on US economic
growth of about 0.5% of GDP in 2014. QNB
Group therefore forecasts the US economy to
grow by only 1.5% next year.
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.

2. QNB Economics
economics@qnb.com.qa
Critically, the budget deal does not eliminate the
potential for a renewed fiscal crisis. The deal
does not include an increase in the US debt
ceiling, which will again become binding on
February 7, 2014. Unless this ceiling is raised,
the US government will not be able to fund its
operations, which would raise again the risk of
an unprecedented default on US government
debt.
Over the medium term, the problem of
containing
health
and
social
security
entitlements has not been addressed by this
budget deal. According to the Congressional
Budget Office, these entitlements are expected
to rise significantly to about 15.0% of GDP by
2023 as a large portion of the US population, the
so-called baby boomers, retire. This represents
a significant challenge to keep the fiscal deficit
under control while having sufficient room to
address the growing infrastructure needs of the
US economy. The current budget deal leaves it
to a subsequent Congress to address this
challenge.
Overall, the budget deal does not change the US
long-term fiscal outlook, according to QNB
Group. While it avoids another government
shutdown, it does not address the challenge of
reducing entitlements over the medium term.
Moreover, it does not address the risk of a
possible government default once the US debt
ceiling becomes binding again early next year.
As a result, QNB Group keeps to its current
forecast of 1.5% US growth in 2014.
** Ends **
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.