Tax-and-spend is turning into a tail wind for the economy in the wake of the midterm elections.
The combined budgets of cities, states and the federal government will add 0.4 percentage point to annual growth in the fourth quarter of this year, after reducing it by 0.9 point in the year-ago period, according to St. Louis-based Macroeconomic Advisers.
While the swing was in play before Nov. 4, it will be accentuated by the ballot results, as municipalities spend the proceeds of newly approved bond issues and congressional Republicans eye increased outlays on defense.
"The end of the fiscal drag is a key reason why the economy is accelerating right now," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in New York.
Helped by a surge in military expenditures, GDP grew at a 3.5 percent annual rate in the third quarter, after a 4.6 percent gain in the prior three months. That marked the strongest back-to-back readings since 2003.
The shift is bolstering the labor market as governments are hiring again. It also means the Federal Reserve can begin raising interest rates next year without having to worry about undercutting the expansion, O'Sullivan said.
Last year's budget restraint was the strongest since the recession ended in June 2009, as Congress eliminated a payroll-tax cut, raised income taxes on the wealthy and reined in spending. The economy also was hurt by a partial 16-day government shutdown.
The bulk of the boost in the public sector is coming from state and city governments. After tightening their budgets for three years following the end of the recession, they began stepping up spending in 2013 and continued to do so.
They will add about 300,000 jobs to payrolls in the next two years, more than offsetting a probable 50,000 cut in the federal workforce primarily from attrition in jobs not filled, said Paul Edelstein, U.S. economist and director of financial economics at IHS Global Insight.
