Bridgewater Daily Observations - "Fiscal Policy Restraint on US Growth Will Ebb Over the Next Year"

Bridgewater:  “fiscal policy has been a persistent drag of about 1% of GDP over the past three years”

 

Wowsers!

 

Bottom line:  As fiscal restraints ebb over the next year it should add approximately 1.4% to GDP, so we go from around 1.7% GDP to, let’s say, 3% ish GDP.

 

From: Bridgewater Daily Observations
Sent: Friday, November 22, 2013 7:53 AM
To: John Broussard
Subject: Bridgewater Daily Observations - "Fiscal Policy Restraint on US Growth Will Ebb Over the Next Year"

 

Fiscal Policy Restraint on US Growth Will Ebb Over the Next Year

 

After providing a material support to the US economy following the financial crisis, fiscal policy has been a persistent drag of about 1% of GDP over the past three years.  During this period of fiscal restraint, however, monetary policy has remained highly stimulative, helping to produce growth rates high enough to provide for a slow normalization of economic conditions.  This, in turn, has allowed the fiscal deficit to come down to the point where government debt levels as a percentage of GDP are stabilizing.  Looking ahead, our expectation is that the 1% fiscal drag currently being experienced by the economy will finally fade over the next 6 to 9 months, supporting US growth.  And beyond that, we see little appetite from policy makers to make further cuts in spending given the improvement in the fiscal deficit and the stabilization of government debt/GDP.  While the declining fiscal drag is just one of many influences on US growth, it is a meaningful factor in our “base case” expectation of a modest pickup in growth next year from the current pace of about 1.5-2%.

The largest component of the fiscal drag recently has been direct austerity measures, primarily from the sequestration cuts and discretionary spending caps. However, these measures were largely onetime cuts, and as the economy adjusts to the lower spending levels, the impact on growth will fade over the next year. There have also been defense spending cuts outside of sequestration as the US involvement in Afghanistan and Iraq has been scaled back (i.e., cuts not directly related to fiscal policy), but going forward these cuts will gradually end as well. Overall cuts in defense have trimmed about 0.5% from GOP over the last year. There are also a number of small programs rolling off negatively affecting growth now that will also gradually ebb.

 

USA Fiscal Measures Impact On Growth (%GDP)
	Past Six Months	Next Six Months	2ND HALF 2014
2013 Austerity Measures	-0.90%	-0.40%	-0.20%
Seq uestration	-0.20%	-0.10%	-0.10%
Discretionary Spending Caps	-0.30%	0.00%	0.00%
Portion of UE Benefits Rolling Off	-0.10%	-0.20%	0.00%
Bush Tax Cut Expiration	-0.10%	0.00%	0.00%
Other Tax-Related Measures	-0.10%	-0.10%	0.00%
Other Programs	-0.50%	-0.40%	0.00%
CBO Defense Spending Cuts	-0.20%	-0.20%	0.00%
State and Local Deficit Cutting	-0.10%	-0.10%	0.00%
Previous Extended Child Care Credit Ending	-0.10%	0.00%	0.00%
Obamacare 3.8% Tax Increase	-0.10%	0.00%	0.00%
Miscellaneous	-0.10%	-0.10%	0.00%
Total Impact of Government Programs	-1.40%	-0.90%	-0.20%

 

Looking ahead, it is worth noting that there are still two key fiscal issues that need to be resolved in the next few months: extending the continuing resolution to fund the government and raising the debt ceiling. Unlike previous instances of dealing with these issues, it is unlikely that there will be a large political impasse that risks a severe fiscal contraction this time around. Rather, these events are unlikely to meaningfully change the path of fiscal policy, given that the deficit has largely been reduced and there is little political will for further cuts, as discussed further below. Our expectations for the fiscal impact on growth are a base case scenario that actually includes slight reductions in austerity relative to the current base law. This is not to say, of course, that the annual process of raising the debt ceiling and funding the government could not get contentious again in future years.