Debt ceiling deal won’t have much impact on the US economy, analysts say

CNN

By Bryan Mena, CNN

Washington, DC (CNN) — President Joe Biden and House Republicans have finally agreed on a deal to raise the government’s debt ceiling, including changes to the federal budget in a number of areas. Analysts say the agreement could have only marginal effects on the US economy.

That’s based on various estimates showing that government spending will be only slightly pared back over the two years of the deal, creating a small effect on overall economic output as measured by gross domestic product, including a limited number of job losses.

The US economy is the world’s largest, so the relatively modest effects on growth could be good news for investors who feared the debt ceiling crisis could have posed a greater and more widespread drag.

“The impacts will be negative but small,” Mark Zandi, chief economist at Moody’s Analytics, told CNN. “When you net it all out, it’s a modest headwind to a sluggish economy, but I don’t think it’s the thing that’s going to blow the economy over into a recession.”

Despite the deal’s limited macroeconomic impact, some analysts say it could also usher in a new era of tighter fiscal policy as congressional lawmakers contend with a national deficit that ballooned during the years of the Covid-19 pandemic.

Here’s what’s in the proposed deal and how it would show up in the broader economy.

What’s in the debt ceiling deal

The deal would suspend the federal government’s $31.4 trillion debt limit through January 2025. It would keep non-defense spending relatively flat in fiscal 2024 and then set a cap of 1% in spending increases for fiscal 2025. The US government’s fiscal year runs from October through September.

In addition to curbing spending, the deal would protect veterans’ health care benefits, temporarily broaden work requirements for certain adults receiving food assistance benefits, claw back some Covid-19 relief funds, cut funding for the Internal Revenue Service, restart student loan repayments, maintain climate measures, and expedite a natural gas pipeline in West Virginia.

The Congressional Budget Office is expected to release a detailed analysis of the deal some time this week.

The proposed deal still has to pass through both chambers of Congress and be signed into law by Biden, though financial markets have responded positively and some companies have already seen their stock rise. The US House is on track to vote on the deal Wednesday evening. If the bill passes, a Senate vote is likely as soon as Thursday.

The debt deal and GDP

Economists at Goldman Sachs expect the deal to reduce federal spending by as much as 0.2% of gross domestic product per year over the two years of the deal, compared with their baseline estimate.

“The boost to funding Congress approved late last year for FY23 was so large (nearly 10% year over year) that overall discretionary spending is likely to be slightly higher in real terms next year despite the new caps,” Goldman Sachs economists wrote in an analyst note.

However, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a webinar that he expects the deal to reduce GDP growth by about 0.2% in 2024 and by a further 0.1% in 2025, which are “well within the margin of GDP measurement error.”

And Gregory Daco, EY-Parthenon’s chief economist, estimated that the proposed deal would have a 0.3% drag on real GDP in 2024 and lead to 250,000 job losses. The economy had about 161 million filled jobs in April, according to data from the Bureau of Labor Statistics.

At least for now, the light at the end of tunnel in the form of a debt-ceiling deal seems to have reassured financial markets.

“Getting this uncertainty out of the way for markets and decision makers has a real impact,” said Mike Skordeles, head of US economics at Truist Advisory Services.

The resumption of student loan payments later this year, which was planned even before the debt ceiling drama, would also have a minor macroeconomic impact, since Americans’ savings accounts remain in good shape, along with the labor market holding up for now, Zandi said.

But one analyst said the deal might mark the beginning of an era of austerity, defined as a set of economic policies aimed at controlling debt.

“What we’re seeing in this deal is really just the first step in a series of austerity measures that could be on the horizon to rein in those interest costs that seem to be getting ever larger as we progress through the 2020s and into the 2030s,” Michael Reynolds, vice president of Investment Strategy at Glenmede, told CNN.

“Investors are going to need to sort of grapple with the fact that it’s probably biased lower spending from the federal government going forward. Even accounting for this change, there may be other changes in the pipeline that would further reduced spending.”

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