Prepare for the Return of Budget Battles, Debt Drama and Other Washington Uncertainty – Real Time Economics

A debt clock on Capitol Hill in July.
PAUL J. RICHARDS/AGENCE FRANCE-PRESSE/GETTY IMAGES

For the last 18 months, investors have enjoyed a period of relative calm when it comes to fiscal policy. That could soon change.

A budget impasse looms this fall as Republicans and Democrats remain at odds over how to fund the government next year, says Joel Prakken, chairman of economic forecasting firm Macroeconomic Advisers, in a new report. Congress will also need to raise the debt ceiling as soon as late October.

“We’re moving back to the environment we had in 2011 and 2013 when we were passing these stopgap measures because we couldn’t decide what we were going to do,” he said.

An index tracking fiscal-policy uncertainty fell last year to its lowest level since 2009. The lull largely reflected how lawmakers in late 2013, following a messy partial government shutdown, agreed to lift spending curbs for two years.

The bipartisan agreement expires Oct. 1, when Congress will again be subject to the caps known as the sequester. Sure enough, the uncertainty index through June has climbed to its highest level since the 2013 shutdown as Congress nears this autumn’s deadlines.

With time running out and Republicans struggling to pass spending bills, House Speaker John Boehner (R., Ohio) last week said Congress is likely to pass a stop-gap funding resolution to buy more time in September.

Many analysts say a shutdown isn’t that likely. Upon retaking control of the Senate last fall, Majority Leader Mitch McConnell (R., Ky.) essentially ruled out another shutdown. Meanwhile, differences over the spending levels aren’t enormous.

At issue is around $74 billion in extra funding the White House wants, equally split between the military and other domestic programs, above the sequester levels. Republicans have already signed onto an increase in military funding but are balking at the rest.

One reason the White House wants to hash this out now: Freezing spending levels this year will make it much harder to raise spending next year in the thick of the presidential campaign.

Still, Mr. Prakken sees a growing risk of a partial government shutdown because Republicans haven’t shown any indication of backing down from spending curbs they agreed to in a budget resolution earlier this year.

Mr. Prakken says the spending cuts contemplated by the Republicans’ 10-year budget proposal are sharp, equal to 2% of gross domestic product between 2016 and 2018. “That is a significant fiscal contraction in a short period of time,” he said.

Moving ahead with those cuts would create enough of a drag on the economy to boost the unemployment rate by half of a percentage point next year and reduce inflation.

“The implications for monetary policy are potentially dramatic,” said the Macroeconomic Advisers report. Their forecast suggests the Federal Reserve “would abort the widely expected tightening and be forced instead to push the funds rate back towards zero.”

With Democrats firmly opposed to GOP spending cuts, Mr. Prakken says a partial shutdown can’t be easily dismissed. Either way, he says, policy uncertainty will return to Washington this fall after its recent hiatus.

Related reading:

Should Congress Abolish the Federal Debt Limit?

Six Ways Debt Ceiling Brinkmanship Can Hurt the U.S.

Fiscal Policy Is No Longer a Drag on the U.S., Business Economists Say

Fed Signals Fiscal Policy No Longer Seen as Drag on U.S. Economy

Q&A: What the $18 Trillion National Debt Means for the U.S. Economy

Obama May Highlight Shrinking Budget Deficits, But They Mask Mounting Debt

Why the White House No Longer Projects a Decline in Debt

 


 


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30 July 2015 | 3:42 pm – Source: blogs.wsj.com

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