Debt ceiling deal: 5 takeaways on its economic impact

The nation appears to be on track to avoid an economic calamity. A last-minute debt agreement between President Biden and House Speaker Kevin McCarthy (R-Calif.), forged this weekend, has families and business owners optimistic that lawmakers will pass a deal in time to avoid a catastrophic default.

The proposed deal would raise the federal debt ceiling allowing the government to borrow more to pay its obligations, and it would also fund the government for the next two years. But how would this bipartisan deal affect households, businesses and the overall economy? Experts weigh in with five takeaways.

Debt ceiling deal: Here is what’s in and what’s out

1. The plan would do very little to balance the budget

Despite months of pointed debate, the debt ceiling deal is expected to do little to bring down the national deficit, which is the gap between the government’s income and its spending on a given year.

The agreement would cut spending by $1.5 trillion over the next 10 years, according to a Congressional Budget Office analysis out Tuesday.

But those savings wouldn’t balance out the country’s largest expenses, which include Social Security, Medicare and the military, which weren’t touched. Those spending areas were off-limits from the negotiation in the first place and will continue to fuel deficits over the next decade.

Instead, proposed spending caps are limited to “nondefense discretionary spending,” a category that includes funding for education, national parks and scientific research, and makes up less than 15 percent of the $6.3 trillion the United States spent in the last fiscal year. Spending on such programs would fall by $1 billion next year and rise by 1 percent in 2025, according to a White House official.

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In all, the impact of those measures on the economy’s growth is expected to be marginal, contributing to a reduction in the annual deficit by “a few tenths of a percentage point,” according to analysts at Deutsche Bank. Since October, when fiscal year 2023 began, the federal government has spent $925 billion more than it has collected, according to the Treasury Department.

Still, the Committee for a Responsible Federal Budget, a Washington think tank that advocates for deficit reduction, praised the plan as “the first major deficit-reducing budget agreement in almost a dozen years.”

2. Americans’ incomes are likely to take a hit, as student loan payments would resume in September

Student loan repayments have been on hold since March 2020, costing the government roughly $5 billion a month in lost revenue. If passed, the debt agreement would require some 43 million Americans to resume payments in September, slightly earlier than expected.

As a result, households could see a $40 billion reduction in disposable income, estimates Joseph Brusuelas, chief economist for consulting firm RSM US. That could quickly blunt Americans’ spending power, especially at a time when many families are struggling to keep up with high inflation on necessities like food and gas.

“These aren’t trivial payments, so it can’t be good for demand,” said Claudia Sahm, founder of Sahm Consulting and a former Federal Reserve economist. “It means families will have less discretionary money in an environment where inflation is still high and costs are rising.”

3. Families that rely on food assistance could feel the pinch, especially amid rising prices

The debt ceiling deal includes changes to nutrition programs, including new work requirements for adults who receive help through Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP). Beyond those changes, the deal creates a spending cap on the Special Supplemental Nutrition Program for Women, Infants and Children (WIC), $615 million short of government estimates for what is needed to feed new mothers and pregnant women and their young children in the next fiscal year.

“The drastic gap in WIC funding is worrisome, particularly when families are facing high food costs and already struggling to put healthy foods on the table,” Jamila Taylor, president of the D.C.-based National WIC Association, said in a statement. “The funding gap resulting from this deal — which favors defense programs at the expense of investments that serve families and communities — puts WIC at risk of being unable to meet the increasing demand for its services.”

4. The rock-solid job market is likely to soften a little

One byproduct of weaker government spending: fewer jobs.

A pullback at the federal level would trickle down to businesses, causing them to curb hiring. As a result, families would spend less, further weakening demand for goods and services.

Overall, new spending caps could cost the economy about 150,000 jobs by the end of next year, according to estimates from Mark Zandi, chief economist at research firm Moody’s Analytics.

That would be enough to push up the unemployment rate by about one-tenth of a percentage point. The current rate, at 3.4 percent, is near historic lows.

“Now, that’s not great,” Zandi said at a Washington Post Live event this week. “I mean, the economy is struggling. Recession risks are high. If I were king, this isn’t what I would do, but 150K in the grand scheme of things is manageable.”

However, there are also protections in place to keep unemployment from rising too much. If the economy were to go into a recession in the next two years, the government could boost social assistance programs, food stamps and unemployment insurance, according to Brusuelas, the RSM US economist.

“We do not see the debt ceiling agreement as imposing any real spending restraint that would tip the economy into recession,” Brusuelas wrote in a research note. “The agreement’s impact on economic growth will most likely be negligible over the next two years.”

5. Overall, the plan wouldn’t be a big drag on the economy

Although parts of the debt agreement could weigh heavily on families and businesses, the deal is expected to have little, if any, fallout for the nation’s economy. Estimates vary, but Gregory Daco, chief economist at consulting firm EY-Parthenon, wrote that he expects the spending caps could drag down overall economic growth by a “modest” 0.3 percent next year.

“On a personal level, this is a big deal for individual hardship and safety nets, on principle,” said Sahm, the former Federal Reserve economist. “But big-picture, this isn’t a game changer for the economy.”

But that pales in comparison to the global catastrophe — and near-certain recession — that would be likely if the United States doesn’t forge a deal in time. In that scenario, Daco expects that a recession would have wiped out 5 percent of the country’s economy.

As debt ceiling negotiators finalize deal, the nation watches anxiously

Zandi, meanwhile, predicts a U.S. default could lead to as many as 8 million job losses and $10 trillion in lost household wealth. The alternative — a bipartisan deal that would hopefully stave off a fiscal crisis, he said, is a much better outcome for the economy.

“I’ll have to say it’s about as good as it gets. I mean, given all the various scenarios that could have played out here, I do think this is a reasonably good ending to the story,” he said Tuesday. “Hopefully, it is the ending, and they get this across the finish line in the next few days and pass a piece of legislation that the president can sign.”

Jeff Stein and Tobi Raji contributed to this report.

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