As widely expected, the negotiations over the US fiscal cliff provided markets with a bumpy ride over the Christmas and New Year period.
The full range of emotions was experienced, from hopes for a Grand Bargain in mid December to fears that the politicians would take the economy over the cliff in the final days of the 2012.
The main battle ground in the negotiations was the threshold in which temporary tax cuts during the Bush era would become permanent. Having exhausted all remaining time, Democrats and Republicans split their ideological differences and settled on a threshold of individuals earning under $US400,000.
In the end, the package of fiscal measures passed by the Congress represents a muddle through. By our estimates it creates a fiscal headwind of 1-1.5% of GDP in 2013, which is broadly the outcome that economists had expected (and significantly lower than the 4.5% headwind from going over the cliff if no agreement could be found).
The bad news is that the US still has unsustainable government debt dynamics.
Both the level of US government debt and projected fiscal deficits are higher than either the Republicans or Democrats want. Reflecting this, automatic government spending sequesters have only been delayed two months.
These will be renegotiated as part of another round of political battles about how to bring US government spending under control. So expect the political drama and bumpy ride in markets to continue.
The good news is that in recent months the US macroeconomic background has been improving. Despite the uncertainty created by the US fiscal cliff, economic data suggests an economy in recovery mode: the US ISM survey has moved into expansionary territory.
Furthermore, the remaining negotiation over US government spending represent a much smaller component than tax rises in the overall political battle over fiscal policy.
In effect, for markets, a scary looking US fiscal cliff has been turned into a more manageable looking US fiscal slope. Markets have opened in 2013 breathing a sigh of relief.
Christian Hawkesby is head of fixed interest at Harbour Asset Management
This article is tagged with the following keywords. Find out more about MyNBR Tags
- Spark boss ditches *another* Sky decoder
- Ardern cruises to Mt Albert victory, bringing Huo into Parliament
- Smith’s swimmable rivers scheme burning holes in farmers’ wallets
- Carry on: Xiamen for Auckland, Cathay for Christchurch, Virgin for HK and more
- Sky TV offers a deal – here’s why Spark won’t take it
Most listened to
- Business Week in Review with Grant Walker and Andrew Patterson
- Rob Hosking on the politics of protest vs the politics of government
- Rodney Hide: Advance means retreat for glacier scientists
- Stewart Germann and Gehan Gunasekara go head-to-head on the franchising debate
- Racism lies behind Little’s kaupapa Maori attack, says Matthew Hooton