Potential Impact of the Budget Deal on the Economic Outlook

Yesterday the CBO released its cost estimate of yesterday’s budget deal.  Our just-released forecast does not include this.  Passage is not assured.  Party leaders like it; many troops don’t.  Hence, our wait and see attitude.  The deal:

  • Raises BCA/sequester spending authorization levels in 2014 and 2015 only.
  • Extends sequester-based cuts in Medicare to 2023 from 2021.
  • Makes some other modest cuts in direct spending over the next decade.
  • Raises a very modest amount of revenue through fees and government pension contributions over the next decade.

Our quick take based on CBO’s cost estimate:

  • We estimate that the bill will raise federal outlays by $28 billion in calendar year (CY) 2014, by $15 billion in CY15, and by $3 billion in CY16.
  • Revenue offsets are very small.
  • The direct impact (that is, without multiplier effect) is to raise GDP growth by 0.16 percentage point over 2014 (relative to the sequester baseline)…
  • …but reduce growth by 0.07 percentage point and 0.06 percentage point over 2015 and 2016, respectively.
  • With multipliers and rounding, the impact is roughly +0.2 percentage point in 2014 and -0.1 percentage point in both 2015 and 2016.

Other points on the budget deal:

  • No extension of EUBs and no mention of the doc fix.
  • If the doc fix is not implemented, the effect would largely offset the effects mentioned above…
  • …not to mention causing supply-side issues for Medicare.
  • We have to believe the doc fix will be addressed in other legislation before year’s end.
  • The deal would reduce some near-term fiscal uncertainty…a plus.
  • However, it leaves the current debt ceiling timeline in place. This could become an issue in the winter or spring.

Interpretation of our fiscal assumptions was muddied by the recent NIPA benchmark revisions to the government accounts.  However, before then, our forecast was roughly lined up on the sequester level of spending, and we have tried to maintain that position through the benchmark revision while awaiting CBO’s next NIPA translation of the federal budget.  Hence, we would say that, were we to layer this deal on top of our just-released base forecast, the result would be a modest addition to GDP growth in 2014 and modest subtractions in 2015 and 2016.


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