Economic News & Analysis—December 11, 2013

Budget deal: A gimmick that just might work

By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

To end the standoff that partially closed the government at the beginning of October, a bipartisan committee headed by Senator Patty Murray and Representative Paul Ryan was tasked with developing a budget for the federal government by December 13. The committee delivered a deal ahead of schedule.

The compromise, which will be voted on by the House later this week, would set 2014 discretionary spending at $1.012 trillion and 2015 discretionary spending a bit higher—more than what is called for under the sequester. The caps on discretionary spending came about as a result of a failure in November 2011 to come up with a long-term deficit reduction plan. However, because of revenues from higher fees on airline passengers, higher fees for the Pension Benefit Guaranty Corporation, federal employees bearing more of the cost of retirement benefits, and a two-year extension of the 2% cut in Medicare (all the way out in 2022 and 2023), the deal actually cuts the U.S. budget deficit by approximately $20 billion.

These budgets are rarely abided by when they purport to restrain future years' spending; therefore, I view a commitment to reduce spending in 10 years as a bit of gimmickry. However, because the plan on the table reduces the deficit relative to just keeping the sequester in place for 2014, it could gather just enough Republican support to pass through the House. The challenge will then be in getting the bill through the Senate. The plan doesn't extend unemployment insurance benefits, and it requires federal employees to shoulder more of the burden of their retirement benefits. These could be significant obstacles to unanimous Democrat support because many Democrats have asked for an extension of unemployment benefits and to not burden federal employees further. President Obama has endorsed the bill as a first step, so that may help galvanize support.

It is highly likely that there will be just enough support to pass this budget into law—a first since April 2009. More important, passing a budget will take the threat of a government shutdown off the table. The budget deal doesn't do anything about the debt ceiling, so that could still be used as part of the political game in Washington, but this compromise makes it a lot less likely that politics in D.C. will adversely affect consumer, investor, or business sentiment.

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