Debt Ceiling: Getting to Yes

When selecting topics for our commentary, we endeavor to avoid repeating subjects in short order. The global economy offers no shortage of fodder for research and analysis. But we will waive the rule for urgent circumstances, and the U.S. debt ceiling certainly qualifies. Since our review two weeks ago, the immediate circumstances are little changed, but the stakes and consequences are becoming clearer.

As we go to press, negotiations toward some sort of deal continue. Comments from participants have ranged from constructive to frustrated. Last Friday, Republicans walked away from the table in the morning, but returned in the afternoon. President Biden and House Speaker McCarthy have both given assurance that the U.S. will not default, without an accompanying plan to actually prevent default.

Sticking points in the standoff center on the level of spending in fiscal year 2024, and caps on spending growth thereafter. The “Limit, Save Grow Act” (LSG) bill, the basis for Republicans’ negotiations, called for returning funding of federal agencies to fiscal year 2022 levels, a reduction of $131 billion (8%) to discretionary spending. However, as written, that would entail a cut to military spending, a contentious idea in an era of higher geopolitical risks. Focusing cuts on just non-defense discretionary spending puts only about 12% of the federal budget in scope for reduction. Cuts to programs in agriculture, education, transportation, science and energy may prove unpopular.