Debt ceiling update: A resolution at last

Summary

Over Memorial Day weekend President Joe Biden and Speaker of the House Kevin McCarthy struck an eleventh hour agreement to suspend the debt ceiling through year-end 2024. The House of Representatives intends to vote on the deal today, and it is widely expected to pass. This would tee up a vote in the Senate within the next few days, allowing President Biden to sign the bill into law shortly thereafter.

The most important macro drivers in the bill are the discretionary spending budget caps for fiscal years 2024 and 2025. Despite the caps, discretionary spending should continue to grow at a modest pace over the next couple of years, in contrast to the outright spending cuts seen in the wake of the 2011 debt ceiling episode.

The debt ceiling bill contains numerous other policy changes, such as rescinding some unspent COVID relief money, streamlining some energy project permitting and tweaking work requirements for the Supplemental Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). However, we doubt these policy changes will have a material impact on our U.S. economic forecast. The bill also codifies the end of the student loan payment moratorium 60 days after June 30. This was already the stated intention of the Biden administration, but the debt ceiling bill ensures another extension will not occur without an act of Congress.

These policy changes present a small downside risk to our current economic forecast. Incorporating this agreement into our forecast probably will reduce real GDP growth by a modest 0.1-0.2 percentage points per year over the next couple of years.

The Congressional Budget Office estimates that the bill will reduce budget deficits by about $1.5 trillion over the 2023-2033 period. Admittedly, CBO projections rely on a host of assumptions about what future Congresses will do, and the actual deficit reduction could be much bigger or smaller than the $1.5 trillion figure.

Setting aside the specific figures, we think this bill marks an important inflection point in federal fiscal policy. The past several years have been marked by highly accommodative federal fiscal policy. This era may be coming to an end as federal fiscal policy is shifting to a more neutral stance.

It is important to note that the debt ceiling bill is not the end of the road for the FY 2024 budget process. Now that topline spending levels have been set, Congress must pass the 12 annual appropriation bills before the start of the next fiscal year on October 1. If Congress does not pass the 12 appropriation bills or a continuing resolution (CR) by September 30, a government shutdown would ensue.

Assuming a government shutdown is avoided, the debt ceiling and budget drama should subside until after the 2024 election. However, the next president and Congress will face a long list of fiscal policy items to address in 2025. These include another debt ceiling increase, setting new discretionary spending levels, the expiration of major parts of the 2017 Tax Cuts and Jobs Act, and the expiration of more generous subsidies for purchasing health insurance under the Affordable Care Act.

We do not expect Congressional action on these items anytime soon, but we highlight them to remind readers that a potential lull in the federal fiscal policy action over the next 18 months might be followed by major fiscal policy shifts after the 2024 presidential election. In the coming months we will explore the potential policy implications of next year's election. Stay tuned.

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