• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Slough welcomes commitment that Office for Local Government ‘will not be a burden’

    June 30, 2022

  • Homes England agrees strategic partnership with two authorities

    June 29, 2022

  • Soaring inflation and pay pressures to add £3.6bn to council budgets

    June 28, 2022

  • Underfunded social care reforms could ‘exacerbate workforce pressures’

    June 27, 2022

  • Nottingham City Council leader labels proposed intervention as ‘disappointing’

    June 27, 2022

  • Government preparing to intervene in Nottingham City Council

    June 23, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Super Committee tinkering unlikely to have impact

0
  • by James Bevan
  • in Blogs · James Bevan
  • — 23 Nov, 2011

As the breakdown in the Congressional Super Committee grabs headlines everywhere, it is important to keep in mind that these fiscal policy choices will generally have a relatively small impact on the economy, while the economy will have a very big impact on fiscal balances. This is just a matter of mechanics. The
strength of the economy determines the level of employment, which is the principal determinant of the level of tax revenue and the need for various forms of government spending support, and this challenge is broadly the same in Euroland and the UK.

With the US, the deficit expanded from $250bn to $1.5tn almost entirely because of economic weakness, and the cuts that everyone is fighting over will only bring this down to $1.4tn. On the other hand, if the unemployment rate fell from 9% to 5%, the deficit would naturally fall back to pre-crisis levels. Put simply,
stimulating growth by addressing the deleveraging process would have a much bigger impact on the economy and the deficit than addressing the deficit directly. It is possible but extremely difficult to reduce substantially a fiscal deficit through direct budgetary action because the very act of reducing spending and raising taxes hurts the economy, and it is extremely difficult because the pain is intense.

While big impacts on the economy are unlikely via fiscal policy, smaller impacts are more achievable. For example, last year’s payroll tax cut boosted the US economy by a bit but is scheduled to expire at the end of this year. The partisan politics that led to the failure of the Super Committee threaten the renewal of this programme, and if it is not renewed this would cut GDP growth by about 0.5% in the first half of next year. And there are a number of other programmes which are expiring at the end of 2011, as well as the expiration of the Bush tax cuts in 2012, all of which are also vulnerable to political wrangling.

Given zero interest rates and deleveraging pressures, bringing down the unemployment rate is proving to be very difficult. The Fed can’t cut rates enough to stimulate a credit expansion, quantitative easing is far less effective if not accompanied by fiscal stimulation, and political pressures are making it increasingly difficult to provide enough monetary stimulation to create a robust expansion.

In order to bring down the unemployment rate, demand must rise faster than productivity and labour force growth, which combined are about 2.5%. And for every 1% of extra growth you get about a 0.5% reduction in the unemployment rate. So bringing the unemployment rate down to 5% in four years would require average annual growth of about 4.5% per year.

Given an unchanged unemployment rate we are likely to have a roughly unchanged fiscal deficit. The automatic cuts (sequestration) that will take place as a result of the Super Committee’s failure are just tweaks on the margin relative to that picture.

The deficit will decline much faster if all of the existing stimulus measures are allowed to expire over the next few years as scheduled, but if growth is not more robust, allowing stimulus programs to roll off will be painful, and the unemployment rate could easily rise as a result of allowing all of the current stimulus programmes to roll off, which would slow down the improvement in the fiscal deficit.

At the current pace of borrowing, US government debt will rise from 40% of GDP before the crisis to 135% of GDP in ten years. The sequestration cuts would only bring this down to 130% of GDP.

With the failure of the Super Committee, the only way to extend the stimulus programmes that expire before the end of the year would be do so through the omnibus spending bill in December. Expiry of current programmes will cut US growth by about 1% in the first half of next year. As things stand, the payroll tax is still relatively likely to get extended but other stimulus programs are likely to expire.

The failure of the Super Committee is less impactful on the aggregate economy than this austerity and expiring stimulus, as it mainly affects the sector allocation of the cuts (e.g. more cuts in defence). This is because the size of the cuts that will take place in 2013 have already been agreed to, while the Super Committee was only responsible for agreeing on the nature of the cuts (e.g. defence vs. other spending) and the precise timing.

It is worth noting that there is still time for another deal to be reached before the automatic cuts begin in 2013, and policy makers are already discussing changing the parameters of the automatic cuts.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

Share

You may also like...

  • What would negative sterling interest rates mean for UK money market funds? 25th Feb, 2021
  • LGPS: Making net zero add up to something real 16th Sep, 2021
  • Why doesn’t LGPS make more noise about diversity among asset managers? 14th Oct, 2021
  • New realities of investing cash and liquidity: “What to do now?” 13th Jan, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • Homes England agrees strategic partnership with two authorities
    • Soaring inflation and pay pressures to add £3.6bn to council budgets
    • Underfunded social care reforms could ‘exacerbate workforce pressures’
    • Nottingham City Council leader labels proposed intervention as ‘disappointing’
    • Government preparing to intervene in Nottingham City Council
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 4 hours ago

    Hillier confirmed as keynote speaker for LATIF/FDs’ Summit: Dame Meg Hillier, chair of the Public Accounts Committee, has been confirmed as a keynote speaker for Room151’s combined Local Authority Treasurers Investment Forum (LATIF) and FDs Summit. The… dlvr.it/ST70F7 pic.twitter.com/hxV676Iley

    Room151 4 hours ago

    Councils’ funding at risk due to ‘undercounting’ in census data: Population estimates in London and Manchester may have been significantly underestimated in the 2021 census potentially threatening government funding for frontline services in these… dlvr.it/ST707J pic.twitter.com/VncIyaXa01

    Room151 2 days ago

    Gove at LGA: councils to receive two-year financial settlement: Michael Gove has announced that councils will receive a two-year financial settlement from next year to provide authorities with “financial certainty” and allow them to plan ahead. The… dlvr.it/ST0kSV pic.twitter.com/wxL3UM4sGO

    Room151 2 days ago

    LGPS valuations: the digital journey: Rob Bilton explains how technology is helping to deliver one of the most complex data exercises in the world of public sector pensions. The 2022 valuations for LGPS funds in[...] dlvr.it/ST0kMq pic.twitter.com/VxjSPC2Uvo

    Room151 6 days ago

    Conrad Hall: ‘more sophisticated’ regulation needed for local government: The chair of the CIPFA/LASAAC Code Board has questioned the sophistication of financial regulation in local government and the continuing focus of the Department for Levelling Up,… dlvr.it/SSnPBV pic.twitter.com/G5d7JCWF8c

    Room151 1 week ago

    Slough Council approves plans to restructure finance department: Slough Borough Council has approved plans to restructure its finance department to enhance capacity and capability and to address a “significant weakness” in the function. The local… dlvr.it/SSf8DG pic.twitter.com/l5lmyHmkBg

  • Register to become a Room151 user

  • Previous story Euro crisis rumbles on amidst calls for Treaty change
  • Next story Greek default: 20 days and counting

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares