ANALYSIS: How Budget Deal Should Help Support US Economy

The U.S. Congress did something Wednesday it hasn’t done during three years of partisan warfare: pass a budget deal that won’t likely hurt the economy.

The two-year spending plan all but removes the threat of another government shutdown like the one that slowed the economy in October. Among other things, the agreement will roll back some of the automatic federal spending cuts that kicked in this year.

President Barack Obama is certain to sign the measure, which on Wednesday passed the Democratic-controlled Senate on a vote of 64-36. Last week, it cleared the Republican-run House by a similarly bipartisan margin of 332-94.

The result? Economists say the U.S. economy has a good chance to accelerate at its fastest pace since before the Great Recession struck six years ago.

Growth has plodded along at a 2.4 percent annual rate so far this year. Bolstered in part by the budget deal, the economy is poised to expand 2.9 percent next year, its healthiest pace since 2005, according to an Associated Press survey of economists.

“There was a lot of austerity in 2013,” said Michael Hanson, senior U.S. economist at Bank of America. “We should have a lot less in 2014.”

The budget agreement marks a sharp change from recent years, in which partisan hostilities led to governance by crisis. Deals were struck between Democrats and Republicans only as the government neared an emergency. A last-minute deal in October, for example, removed the threat of a default on the national debt that could have triggered another recession.

The earlier budget deals helped shrink the deficit. But they’ve also squeezed workers and businesses by hindering growth. Higher tax rates, along with spending cuts, subtracted 1.5 percentage points from annual growth this year, according to the Congressional Budget Office. That’s the difference between an economy limping along at 2.4 percent annual growth and one accelerating at close to a 4-percent-rate.

With the new deal in place, economists estimate that the government will exert less of a drag on the economy. The drag on growth from federal policies should decline from 1.5 percentage points this year to 0.5 percentage points at the most, economists estimate.

The bill approves spending in 2014 at slightly more than $1 trillion, compared with the $967 billion mandated by the automatic spending cuts. It boosts spending by $63 billion over two years.

It replaces the spending cuts with longer-term savings, many of which don’t accumulate for nearly another decade. Airline passengers will pay higher ticket fees, but the additional revenue won’t come from tax increases. Deficits would rise slightly in 2014 and 2015.

The compromise could also spur businesses to hire and expand, because they would no longer be operating under the threat of another government shutdown. It also suggests that a compromise will be reached when Congress must again raise the debt limit in February to prevent a possible default. Just the appearance of two nearly implacable political parties agreeing on the first bipartisan budget pact since 1986 has increased hope.

“More significant is that there is a deal at all, as that should eliminate the risk of another shutdown,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics, who forecasts that the economy will grow 3.3 percent next year largely as a result of less drag from the government.

At a news conference Wednesday after the Federal Reserve announced a pullback in its economic stimulus, Chairman Ben Bernanke welcomed the congressional deal.

“It eases a bit of the fiscal restraint in the next couple of years, a period where the economy needs help to finish the recovery,” Bernanke said. “So those things, you know, are positive things.”

Economists said the additional spending from repealing some of the spending cuts should help growth. But some of the gains could be offset by the end of emergency unemployment benefits on Dec. 28. The federal program has extended benefits to 1.3 million people who’ve been out of work longer than six months. The program’s expiration could hurt, because the beneficiaries will have less money to spend on food, housing, clothes and transportation.

But on the whole, the budget deal is viewed as a net positive for the economy.

“For the first time in recent years in Washington, D.C., lunacy has given way to a baby step back towards sanity,” said David Kotok, chairman of Cumberland Advisors, in a client note.