He comments that the final bill which passed the House yesterday is estimated to lead to fiscal tightening of around $250 bln, or 1.5% of GDP dampening previously planned fiscal tightening of around 4.5% of GDP. . It permanently extends the Bush tax cuts for married couples earning less than USD450k and USD400k for singles, and sets the capital gains and dividend rates at 23.8% for those earning above those income thresholds. It also sets the estate tax rate at 40% and exemption at USD5.0 million per person, and permanently indexes the AMT exemption to inflation.
Hardman notes that the deal addresses mainly government revenue measures with spending decisions largely left unresolved, although the deal is likely to prove only a temporary fix to address fiscal uncertainty in the US with the planned sequester government spending cuts merely delayed for two months. He writes, “After the initial relief that some form of agreement was reached, it is likely that investors’ focus will begin to centre upon whether US politicians will be able to raise the debt ceiling in the next two months to avert a technical default, and whether the delayed sequester spending cuts will now come into force on the 1st March.”
The fraught political negotiations again highlight that there is still a high risk of a more unfavourable outcome emerging, with the odds of a grand bargain being reached to put in place more credible long-term fiscal consolidation having also decreased increasing the likelihood of another US downgrade from the credit ratings agencies ahead. Still, Hardman notes that the agreement should prove more supportive for US growth in 2013 as the scale of planned fiscal tightening has been dampened although uncertainty still surrounds the implementation of the sequester spending cuts which were set to total around USD110 billion in 2013.
He finishes by commenting that improving investor risk sentiment is also being supported by further evidence overnight that the global economy is continuing to recover with the HSBC manufacturing PMI surveys for both South Korea and Taiwan returning to expansionary territory above the 50-level in December.