Eye on the Market | April 9, 2012 J.P Morgan Q&A on the USA, with a watchful eye on the risk of giant man-eating plants; Spain So, how tight is US fiscal policy supposed to get next year? Very, if you look at what is supposed to happen according to current law. In the chart, we show the annual change in the budget deficit over the last 25 years. The impact of all provisions scheduled to expire and kick in during 2013 would be very large. But if Congress and the President elect to extend current tax rates, retain lower payroll tax rates and extended jobless benefits, etc, the adjustment would not be as big, and only reflect expiration of Recovery Act provisions, the recently passed Budget Control Act, and some other smaller provisions. There are of course plenty of permutations in between. Wide range of outcomes for 2013 austerity Policies set to expire or take | Fiscal Drag (% Change in cyclically-adjusted federal deficit, % of potential GDP effect under current law of 2013 PGDP) 57. . Sequester Automatic Cuts 5 A Fiscalstimulus (Discretionary Spending) -0.4% 3 | 2013 Hieie nena Cuts 0.1% 2 =eenario (Mandatory Spending) 1 estimates Bush Tax Cuts ($250k+ -0.3% 0 Incomes, Estate Tax) 4 Congress Bush Tax Cuts (Middle Income) -0.9% -2 punts Alternative Minimum Tax -0.8% 3 Payroll Tax Cut -0.6% Fiscaldrag Current Emergency Unemployment -4 law C ti -0.2% 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 OMpensallen Source: CBO, IMF, Goldman Sachs, J.P. Morgan Private Bank. Affordable Care Act 0.2% Source: CBO, Goldman Sachs. What direction is the Congress heading, and what did Larry Summers and Brad DeLong have to say about this recently? Political outcomes this fall will affect what Congress does, but I get the sense that they will punt fiscal adjustments into the future if they can, and impose austerity of no more than 1% of GDP in 2013. Ifso, Congress can point to a March 2012 paper by Summers and DeLong as justification. The bottom line from the paper: don’t tigh