Man bites dog—US politicians reach agreement

Another US government shutdown loomed earlier this week, but this time it was due to the weather, not the dysfunctional political wrangling that lasted for two weeks in October. Senior Republican and Democratic negotiators, Paul D. Ryan and Patty Murray, who chair the House and Senate Budget Committees, respectively, agreed to budgetary measures until the end of 2015 that will allow the government to function without risk of disruption.

The details still have to be approved by both House and Senate this week, and many of the same House Republicans who were prepared to risk the credibility and credit rating of the US government quite recently, have already accused their own leaders of going too far. But the chances are that the agreement will go through. How big a deal is it?

The first thing that needs saying is that the United States has not been and is not anywhere near a fiscal crisis—yet. What crisis there has been has existed in the minds of Tea Party, conservative politicians and their sympathisers. The budget deficit has more than halved from over 10 per cent of GDP in 2009 to about 4 per cent this year. According to the bipartisan Congressional Budget Office, it is going to halve again by 2018. Federal debt has doubled over the last six years to 75 per cent of GDP but the ratio is now stable and predicted to fall slowly. The US Treasury bond market remains a beacon of relative stability in a world of volatile assets. It is only after 2020 or so, when current age-related spending commitments kick in that the fiscal position will deteriorate seriously.

The budget deal cancels the automatic spending cuts that kicked in last March and that may have lowered economic growth by 0.5 per cent, adding to the 1 per cent drag that came from the expiry of tax cuts at the start of the year. The automatic cuts in 2014 would have been around $19bn—not much in the great scheme of things. But remember that mindless spending cuts are destructive in more than just pecuniary ways when businesses remain wary about spending on jobs and investment, and when cuts are targeted on departments, such as education, the environment, social services and public health, as well as defence.

Instead, about $26bn of spending has been restored to the Pentagon and other domestic spending departments, financed, for example, by a rise in fees on airline tickets, and higher pension contributions by federal employees. The measurable effect on the economy, the $45bn swing from spending cuts to add-backs, is about 0.25 per cent of GDP. Again, not huge, but it could prove quite a tonic a) compared with the 2013 drag and b) at a time when the private sector is clawing its way back to slightly faster growth. From the crow’s nest, the prospect of roughly 2.5 per cent growth in the US economy next year now looks as though it could be a bit closer to 3 per cent.

Higher growth, and the avoidance of budgetary brinkmanship that could throw the economy off course, also makes it much more likely that the Federal Reserve will announce the start of “tapering”, or the gradual winding down of quantitative easing, sooner rather than later. This could take place as early as next week when the Federal Open Market Committee—the Fed’s senior policy group—meets on 17-18th December. As this happens, there might be some temporary adverse effects on the recovering housing sector, but bear in mind that the Fed’s commitment to an extended period of frozen interest rates has already been well flagged, and will doubtless be reconfirmed.

Politically, though, while it is unquestionably welcome that both parties have found common ground, it is too early to think about the budget deal as anything more than modest progress. New partisan problems could erupt next March when the US Treasury's statutory authority to borrow money, or the debt ceiling, needs to be renewed. There will be no let-up in the attempts of Republican politicians to de-rail or undermine Obamacare, the President’s signature healthcare reforms. More generally, the deal doesn’t really mollify recent concerns that America is in danger of becoming ungovernable because of the ideological warfare between Republicans and Democrats, and within the Republican Party, about the role and size of government and welfare in the economy. How much bipartisan progress is possible when just under a year from now, all 435 seats in the House and a third of Senate seats will be up for grabs?