Economic Impact from Debt Ceiling Deal Will Be Limited

Congress’ 11th-hour deal to lift the nation’s $31.4 trillion debt ceiling in exchange for spending cuts and policy freezes will stabilize financial markets and avert the potential economic disaster of a default, but the economic impact of the spending agreement will be marginal at best.

Democrats and Republicans passed the bill during an evening vote on Wednesday, sending it to the Senate for what is expected to be an expedited vote ahead of the June 5 date when Treasury Secretary Janet Yellen said the government will run out of options to pay its bills.
Morgan Stanley economists estimate the drag on the U.S. economy from the deal’s spending reductions will be “at most…a couple of tenths off GDP growth in 2024.” Moody’s economist Mark Zandi forecast it would cause a 0.1 percentage-point rise in the current 3.4% unemployment rate.
JPMorgan analysts estimate the agreement would have roughly the same impact on aggregate demand as a quarter-point rise in the federal-funds rate. “Limited macro impact,” wrote Gregory Daco, chief economist with EY-Parthenon, “beside avoiding a self-inflicted catastrophe.” The biggest win is raising the debt ceiling until January 2025, they noted.
The nonpartisan Congressional Budget Office estimates the deal will reduce budget deficits by $1.5 trillion over 10 years. The savings amount to about $4.4 billion in fiscal year 2023 and $69.5 billion in fiscal 2024, Morgan Stanley estimates—or roughly 0.27% of GDP in fiscal 2024.

What’s Next: The CBO’s headline estimate is based on a 10-year horizon, but after the $97 billion reduction in federal outlays CBO is projecting for fiscal years 2024 and 2025, spending caps will become largely “unenforceable,” wrote Joe Brusuelas, chief economist with RSM US.

—Megan Cassella and Janet H. Cho from Barrons