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BofA Merrill Lynch Global Research – A US Economics Report – Tuesday, 18 December 2012

Happy holidays?

After many weeks of delay, the logjam finally broke and budget negotiations have started in earnest. If press reports are correct, there has been notable progress on several fronts:

 President Obama has lowered his 10-year tax demand first from $1.6tr, to $1.4tr and then to $1.2tr. Meanwhile, Speaker Boehner has upped his offer from $0.8tr to $1.0tr.

 Obama has agreed to keep tax rates steady for households with incomes below $400,000 rather than below $250,000. Boehner seems to have accepted higher rates for people with income over $1 million.

 The two sides also seem to be converging on spending cuts. Obama has offered a plan with $1.2tr in spending cuts, including a specific offer to change the cost of living calculation for entitlements. Meanwhile, Boehner talks of $1tr in cuts.

 There also seem to be serious negotiations around many other cliff items, including patching the AMT and letting the payroll tax cut expire.

The press can smell a deal. Today we saw the following headlines:

 Bloomberg: “Obama Concessions Signal Potential Bipartisan Budget Deal”

 Wall Street Journal: “With New Offers, Fiscal Cliff Talks Narrow”

 New York Times: “Obama’s New Offer on Fiscal Crisis Could Lead to a Deal”

 Washington Post: “A ‘fiscal cliff’ deal is near: Here are the details.”

Maybe they can get a pre-Christmas deal after all?

While things look a lot more hopeful than a week ago, we have not changed our call: we expect a deal only at the last minute, with lots of decisions delayed into the new year and austerity of roughly 2% of GDP.



Read the full report here.