Budget deal will boost 2014 economy

The budget deal now passed by Congress will set the stage for faster economic growth in 2014, reducing the impact of federal budget cutting on the economy by as much as half, economists say.

The measure, adopted by the Senate Wednesday, would reduce the automatic spending cuts scheduled for this year by $45 billion and, partly offset them with different cuts. That could boost growth in 2014 by as much as 0.25%, economist Joel Naroff said.

The package does some, but not all, of what ratings agencies and many private economists have been clamoring for, said Moody's Analytics fiscal-policy economist Brian Kessler. Economists have argued that the U.S. should reduce spending cuts now to push the recovery onto more-solid ground, while preparing for longer-term cuts in Social Security and Medicare spending. The bill does defer some spending cuts, but doesn't address the entitlement issues.

"It's a small deal, but it's kind of exactly what an economist hoped they would do,'' Kessler said. "Reducing the fiscal drag in the near term is a positive thing.''

The deal isn't a negative for entitlement reform — it simply doesn't address the issue, said Marie Cavanaugh, a managing director in S&P's sovereign ratings group.

"This doesn't really go in that direction, but it does show a greater facility for compromise,'' Cavanaugh said. "It would be helpful for creditworthiness if there were a plan in place. You wouldn't need for it to take effect yet because of the fragility of the economy.''

STORY: Senate sends two-year budget deal to Obama

Most economists believe the U.S. cut as much as 1.5 percentage points off its growth rate in 2013 because of fiscal policy, both tax increases and spending cuts. With growth running about 2% year-over-year, efforts to reduce the federal deficit cut this year's growth almost by half, according to the International Monetary Fund and other analysts.

With no new tax hikes on the horizon, the drag was expected to fall to as little as 0.! 5 percentage points of growth in 2014 even before the deal, Naroff said.

That is a big part of the reason many economists expected growth to accelerate anyway in 2014, said Diane Swonk, chief economist at Chicago asset manager Mesirow Financial.

The deal would have had a bigger positive impact if it had included an extension of long-term unemployment benefits, which are set to expire on Dec. 28, Swonk said.

Some details of the deal, including the expiration of tax credits that give incentives for business investment and hiring veterans, may hurt unless they are later restored as part of a larger tax bill, said Tom Windram, a partner in the national tax practice at accounting firm McGladrey.

The expiration of the Work Opportunities Tax Credit "isn't an incentive to hire fewer people. It's an incentive to hire different people,'' Windram said.