By Joseph Plocek

WASHINGTON (MNI) – A surprisingly stimulative tax cut agreement out
of Washington on Monday has economists sharpening forecasts to account
for higher economic growth and a higher budget deficit in the coming
year.

The White House’s Fact Sheet on the tax agreement says it avoids a
tax increase of over $3,000 on January 1 for typical working families
and includes measures for “jump-starting growth and job creation,
including a full year of emergency unemployment insurance benefits, an
about $120 billion payroll tax cut for working families and a
continuation of tax credits for working families. This is on top of
growth generated by extension of the middle-class income tax rates.”

Economists at BNP Paribas said the announcement implies “a 2% tax
cut for workers in 2011. The tax cut would reduce the payroll tax (the
tax which funds Social Security) from 6.2% to just 4.2% for next year”
and this makes the largest boost to disposable income $2,136.

BNP economist Bricklin Dwyer makes the point that this helps growth
but hurts the fiscal outlook.

“The Bush tax cuts were expected to be extended and were already
included in our forecast for 2011, however, they will be now be extended
until 2012″ at a cost of about $800 billion. BNP says including the
extension of unemployment benefits and the 2% social security tax credit
bring the cost to around $1 trillion.

That could put the deficit as a percent of GDP to a whopping 9.5%
in FY2011 and 9.8% in FY2012 and raise all government debt to around
74.9% of GDP in 2012.

The silver lining is the package “should provide a noticeable boost
to GDP in 2011. Some of the tax cuts will be saved and some of the
purchasing power will be taxed away through higher energy prices.” BNP
says the package will add 0.3 point to GDP growth in 2011 and 0.2 point
in 2012.

Economists at Citigroup were adding 1.0 point to 2011 GDP if a tax
extension passed. They say the announced program may boost their
forecast further after the new cuts are plugged in.

Goldman, Sachs economists say their recently revised forecast for
2011 could go even higher. “Our rough estimate is that this package
could add 0.5 to 1.0 point to growth in 2011.”

Goldman says the package adds an “incremental $185 billion (1.2% of
GDP) in stimulus above and beyond what we currently have built into our
assumptions” for a boost of 0.5 to 1 point in GDP.

They emphasize details of the package may change slightly as the
package works through Congress and say the package might not be
finalized until next week.

Goldman expects their $1.25 trillion budget deficit estimate for
FY2011 and $1 trillion for FY2012 to rise, the former “probably not by
much more than $100 billion.” They do not expect significant increases
in Treasury coupon issuance as a result.

–Joe Plocek, jplocek@marketnews.com 202-371-2121

** Market News International Washington Bureau: 202-371-2121 **

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