Adjusting budgets to ignore interest payments, the IMF says the so-called primary deficit in the G-7 countries reached an average 5.1% in 2010 when also smoothed to ignore large economic swings and will fall to 1.2% next year.
The unprecedented retrenchments between 2010 and 2013 amounted to 3.5% of U.S. gross domestic product and 3.3% of euro-area GDP, according to Julian Callow, chief international economist at Barclays Plc in London. For the U.S., Deutsche Bank economists estimate nonfarm payrolls would have gained 400,000 a month this year instead of about 186,000 without fiscal restraint.
The U.S. and Europe also fell victim to uncertainty shocks. First the euro area struggled to tame markets rattled by debt burdens and bailouts. Then American lawmakers partially closed the government for 16 days and squabbled over raising the $16.7 trillion debt ceiling before agreeing on a short-term fix that suspended the borrowing cap until Feb. 7.
What matters for economists is the fiscal drag. The greater the tightening, the more restraint as companies and consumers face higher taxes, and there’s less government hiring or spending on programs such as education or roads and other infrastructure. This then feeds through the economy as households and businesses pull back on their own spending.
Even a reduction in the amount of drag can bring relief to an economy, Ursua said. The IMF projects the cyclically adjusted primary deficit for the U.S. will fall to 1.2% of GDP in 2014 from 1.9% this year and 4.2% in 2012. Such a slowing in the rate of decline leads Ursua to calculate fiscal drag will fall by 1.6 percentage points next year. It rose 1.2 points this year.
The room for error lingers. U.S. lawmakers still must agree on a spending plan for the rest of the fiscal year -- which may trigger more automatic spending cuts, including to defense programs -- and they face the Feb. 7 deadline for raising the borrowing limit.
A survey of Bloomberg subscribers last month identified political gridlock in Washington as the biggest threat to global growth. Events there are “the cause of many of the problems” with the economy, William Brodsky, executive chairman of CBOE Holdings Inc., the biggest options-exchange operator, told a Bloomberg LP conference on Nov. 20.
Still, neither Democrats nor Republicans have the appetite for more spending cuts, and changes to the tax code probably won’t come soon, according to Nomura Holdings Inc. economists. If the negotiations go smoothly, the economy could accelerate faster toward the 3% they project for the second half of 2014 and into 2015, they wrote in a Nov. 25 report.
GDP rose at an annualized pace of 3.6% in the third quarter, faster than initially reported, led by the biggest increase in inventories since early 1998, according to Commerce Department data released today.