Economic Snapshot | Budget, Taxes, and Public Investment

The debt ceiling deal’s net impact on jobs

With unemployment at 9.1% and projections for high levels well into next year and beyond, the agreement to raise the debt ceiling stands to lose out on two key job creators unless Congress acts soon. The debt agreement reduces spending by at least $1 trillion over 10 years through budget caps on non-mandatory programs, with additional reductions under discussion in a second phase.

In addition to the immediate cuts to spending, the debt ceiling agreement fails to continue two major policies which had been part of broad agreements in the past.  The payroll tax holiday and extended unemployment insurance, passed last December along with the two-year extension of the Bush-era tax cuts, are set to expire at the end of 2011. While Congress could still extend these policies between now and the end of the year, that scenario looks much less likely today – the debt ceiling deal was a lost opportunity to extend these policies.

The loss of the payroll tax holiday, a tax cut that reduces Social Security payroll tax for all workers, would lead to a reduction in GDP of $128 billion and roughly 972,000 fewer jobs in 2012. Allowing extended unemployment insurance to expire would hurt those who have already taken the hardest hit, reducing GDP by $70 billion and further reducing employment by roughly 528,000 jobs in 2012. Finally, the near-term discretionary cuts ($30.5 billion in calendar year 2012), will have an immediate impact of reducing GDP by $43 billion and leading to roughly 323,000 fewer jobs in 2012. The total 1.8 million fewer jobs will only contribute to a slower, more painful recovery in the long run.

For more on the debt ceiling deal’s net impact on the labor market, see the EPI issue brief Debt ceiling deal threatens deep job losses and lower long-run economic growth.