The economic year 2013 began on a note of trepidation about the effects of fiscal tightening. Probably the biggest story of the year is that the concern proved unjustified. The year ends on a note of trepidation about the effects of monetary tapering. In between, monthly revisions to the volatile employment numbers continued to mask mediocre but steady gains on that front, accompanied by a decline in the jobless rate. But the labor market is still far from healthy.
In January, the ironically named American Taxpayer Relief Act put most Americans on notice that their taxes were being hiked in 2013. The two-percentage-point payroll-tax holiday of the previous two years was rescinded, resulting in 6.2%, rather than 4.2%, levies on yearly earnings up to $113,700. The top income-tax rate was hiked to 39.6% from 35%, and the top rate on dividends and long-term capital gains, to 23.8% from 15%.
Fears that the tax hikes would clobber growth in consumer spending proved mistaken, however. Real personal-consumption expenditures through this year’s first three quarters grew faster than in 2011′s and not far behind 2012′s. Based on strong retail sales in October and November, chances are that 2013 will end up having outpaced both 2012 and 2011. A positive wealth effect from rising stock and home prices must have boosted consumption, along with the spillover effect of purchases of furniture and appliances from increased home sales.
THE SEQUESTER BUDGET CUTS in federal spending that took effect on March 1 provoked fears about a slowdown in growth that also proved mistaken. In the second quarter, when the sequester’s impact should have been most keenly felt, annual growth of gross domestic product accelerated to 2.5% from 1.1%. Given estimates for the current quarter, it now seems likely that overall GDP growth in 2013 will slightly exceed that of 2012.
The combination of higher federal revenue, due in part to the tax hikes, and slightly lower federal outlays, due to the sequester, caused the deficit to fall to 4.1% of GDP in fiscal 2013 from 6.8% in fiscal 2012. But the economy seems to have weathered the much-needed reduction in deficits without much collateral damage. In a rational world, surpluses should be on the horizon, with the funds used to buy back outstanding federal debt.