By Peter Schroeder - 01/02/13 10:24 PM EST
Economists and business groups say the “fiscal cliff” deal will provide some help to the economy, but is overall a missed opportunity to put the nation’s fiscal health on track.
While stocks soared Wednesday on news of the deal and the Dow Jones closed the day up 308 points, business leaders expressed disappointment Congress and the White House again put off work on a significant deficit-cutting deal.
“If you were to rank outcomes from 1 being the greatest to 10 being the worst, we’re about an 8.5 to a 9,” said Steve Bell, senior policy director for the Bipartisan Policy Center, which had pushed for a comprehensive deficit deal. “There’s nothing to compel action now ... it’s an extraordinary opportunity missed.”
Those with good things to say about the deal argued it at least averted the possibility of a recession by extending tax rates for most households, even if higher taxes in the deal — including an end to a 2-percentage-point reduction in the payroll tax — will slow growth.
Tax increases in the agreement will shave 0.75 percentage points off of economic growth in 2013 and 600,000 fewer jobs than if all policies had been extended, said Mark Zandi of Moody's Analytics.
The unemployment rate will be nearly half a percentage point higher as a result of the deal than if Congress had simply extended everything, he said.
Zandi noted that the deal will bring down the deficit somewhat compared to prior policy, but said its “biggest shortcoming” is that it did not do enough to bring about fiscal sustainability.
He estimates that the fallout from this fight, coupled with deficit fixes brought on by the debt limit battle, will lead to an deficit reduction of $1.6 trillion over 10 years — no small amount, but amounting to only half of what is needed to stabilize the U.S.'s debt-to-GDP ratio.
The agreement indefinitely extends lower tax rates for incomes below $450,000 for families and $400,000 for individuals and limits deductions for wealthier households. It increases the top capital gains and dividends rates and slightly raises the estate tax while allowing larger estates to escape taxation by adjusting rules to inflation.
It extends unemployment insurance benefits for one year and a host of other tax provisions for five years. It also delays for two months automatic spending cuts set by the 2011 debt-ceiling deal.
Credit rating agency Moody’s Investors Service warned Thursday that while the fiscal-cliff compromise was a good first step, the U.S. was nowhere near done improving its fiscal position. It said the outcome of a fight this spring over raising the debt ceiling could play a decisive role in whether the U.S. can avoid another credit rating downgrade.
The business community, which pushed both sides hard to strike a deficit-reduction deal in their efforts to avoid the cliff, was tempered in its response.
The deal “only just begins to address the scale of the fiscal and spending problems confronting our country and falls short as economic policy that could encourage a sustained and strong economic expansion,” said the Business Roundtable.
Tom Donohue, the president of the U.S. Chamber of Commerce, hit a similar sour note.
“The tax hikes that will take place will mean slower growth, fewer jobs, and less prosperity for all Americans,” he said in a statement. “And, when it comes to cutting spending and controlling the national debt, this deal does not even begin to address the serious fiscal challenges we face.”
The financial community is already eyeing another debt-ceiling fight similar to the 2011 battle that rocked markets.
“It’s important for all policymakers to keep in mind that maintaining the full faith and credit worthiness of the United States is critically important to maintain throughout this process,” said Rob Nichols, president of the Financial Services Forum.
Business and financial groups had initially joined the White House in pressing for a debt-limit hike to be included as part of a fiscal-cliff deal, but that idea was shelved as talks over a broad deficit-reduction package dissolved.
Now, Wall Street is bracing itself for what looks to be another bruising battle over raising the debt limit, hoping that the standoff won't lead to a government default and market chaos.
“While the legislation passed last evening temporarily swerves America away from the fiscal cliff, another cliff now looms again just around the next corner,” said Tim Pawlenty, the president and CEO of the Financial Services Roundtable. “We look forward to working with the administration and the next Congress to address corporate tax reform, spending reform and the challenges posed by reaching the debt ceiling.”