Thursday, July 18, 2013

The Fiscal Drag of the Sequester

First, the Fed has a great summary of the economy here.  It's included as part of their semi-annual presentation to Congress.

Secondly, the budget deficit is declining in a meaningful way.  

These fiscal policy changes--along with the ongoing economic recovery and positive net payments to the Treasury by Fannie Mae and Freddie Mac--have resulted in a narrower federal deficit this year. Nominal outlays have declined substantially as a share of GDP since their peak during the previous recession, and tax receipts have moved up to about 17 percent of GDP, their highest level since the recession (figure 12). As a result, the deficit in the federal unified budget fell to about $500 billion over the first nine months of the current fiscal year, almost $400 billion less than over the same period a year earlier. Accordingly, the Congressional Budget Office projects that the budget deficit for fiscal year 2013 as a whole will be 4 percent of GDP, markedly narrower than the deficit of 7 percent of GDP in fiscal 2012. In addition, as shown in box figure A, the deficit is projected to narrow further over the next couple of years in light of ongoing policy actions and continued improvement in the economy. Despite the substantial decline in the deficit, federal debt held by the public has continued to rise and stood at 75 percent of nominal GDP in the first quarter of 2013 (figure 13). 

It's very interesting that not one of the supposed deficit hawks has even reported on this development.

Third, the sequester is hurting growth (as most of us in the geek world said it would; see links above):

Fiscal policy at the federal level has tightened significantly this year. As discussed in the box "Economic Effects of Federal Fiscal Policy," fiscal policy changes--including the expiration of the payroll tax cut, the enactment of other tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations--are estimated, collectively, to be exerting a substantial drag on economic activity this year. Even prior to the bulk of the spending cuts associated with the sequestration that started in March, total real federal purchases contracted at an annual rate of nearly 9 percent in the first quarter, reflecting primarily a significant decline in defense spending (figure 11). The sequestration will induce further reductions in real federal expenditures over the next few quarters. For example, many federal agencies have announced plans to furlough workers, especially in the third quarter. However, considerable uncertainty continues to surround the timing of these effects.