JP Morgan Analyst: Federal Fiscal Policy Will Knock 1.7 Points Off GDP Growth In 2012

Yesterday, President Obama signed into law the debt ceiling deal that will cut trillions from the federal budget over the coming decade. According to the Economic Policy Institute, the cuts included in the bill, as well as the expiration of a payroll tax holiday at the end of the this year and the failure of Congress to extend unemployment benefits, will cost the economy about 1.8 million jobs next year.

But that’s not the end of the damage fiscal policy will have on the already weak economy. According to an analysis by JP Morgan Chase, contracting fiscal policy — a combination of the stimulus ending, the debt ceiling deal, the payroll tax cut expiring, and aid to states slowing down — will cost the U.S. 1.7 points of GDP growth next year:

This drag may appear fairly small, but it is on top of the substantial tightening that was already in place prior to the passage of the debt deal. Most of that fiscal tightening comes about through the automatic expiration of temporary stimulus measures. The table below details those measures, the largest of which is the one-year 2%-point payroll tax holiday, which expires next January. Other large programs that are scheduled to expire or phase out are emergency unemployment benefits, accelerated depreciation, increased transfers to the states, and much of the remaining spending associated with the 2009 Recovery Act. All in all, by our estimates federal fiscal policy will subtract around 1-3/4%-points from GDP growth next year. Given that GDP growth has been 1.6% over the past four quarters when fiscal policy has been much less of a drag, this doesn’t bode well for next year.

With unemployment still above 9 percent and long-term unemployment still horrifyingly high, growth coming in below one percent is unacceptable. But with Republicans controlling the purse strings in the House, the government will be actively holding back growth, even as America struggles to shake off the lingering effects of the Great Recession.

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