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Debt-Ceiling Deal: Default Is Avoided – but Experts Say Fiscal Outlook Remains “Unsustainable”

Isaac Nuriani    |
Jun 9, 2023
  • We have a new debt deal in the nick of time, but at least one policy expert says it doesn’t relieve underlying issue.
  • Treasury Department calls current fiscal path “unsustainable.”
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Last Saturday, President Biden signed into law a bill that suspends the debt ceiling through January 1, 2025. With that gesture, the federal government avoided defaulting on its obligations for the first time in history.[1]

The saga of the debt ceiling and prospect of debt default began in earnest at the beginning of the year. It was on January 19 that the government actually hit its figurative head on the most recent debt-ceiling limit: $31.4 trillion.[2]

This time around, Republicans said they wouldn’t vote to raise the ceiling unless spending cuts were part of the deal. Democrats initially insisted the ceiling be raised without conditions.

The resulting standoff is the reason you kept hearing about the “growing prospect of default.” If there was no new limit in place by the time Treasury ran out of ways to keep the country running, the government would have defaulted on its debt for the first time in history. According to Treasury Secretary Janet Yellen, that was on track to occur by June 5.[3]

But a new debt-ceiling agreement was reached in the nick of time, which means the threat of default evaporated. So, crisis averted, yes?

For now, absolutely. But some say there’s more to the story.

It’s true that the latest update to the debt ceiling – which we’re going to discuss in a little more detail shortly – enabled the country to sidestep the prospect of default for now. That’s great news.

However, the details of the new agreement are such that the matter of the debt ceiling will have to be addressed once again less than two years from now. More significantly, observers say, the new deal doesn’t appear to fundamentally change the long-term fiscal outlook of the nation, an outlook that even the Treasury Department refers to as “unsustainable” in a recent report.

Let’s talk about it.

Fiscal Responsibility Act: What Is It, Exactly?

The Fiscal Responsibility Act of 2023. That’s the name of the new law that lifts the debt ceiling through the beginning of 2025.

In this case, when I say “lifts the debt ceiling,” I don’t mean that it raises the debt ceiling to a new, explicitly-identified height that’s a few trillion or so above the $31.4 trillion mark. I mean that it effectively removes the ceiling altogether by suspending it.

Why was the debt ceiling suspended this time, rather than raised outright?

It may mostly have to do with the pending election cycle as well as the contentious nature of our current political climate. Election year 2024 is just around the corner. By agreeing to suspend the debt ceiling for a specific period of time instead of raising it by another incremental sum, both sides – Republicans and Democrats – ensure the matter doesn’t become too direct a factor during the 2024 campaigns. Both sides can claim they achieved a compromise. Now, for the most part, readdressing the debt limit won’t have to be taken up until the next set of elections is resolved.[4]

As for those spending cuts sought by Republicans, they got some…but not a bunch.

Perhaps the most prominent feature of the Fiscal Responsibility Act along those lines is that it keeps non-defense spending in 2024 at the 2023 level. That spending reduction is far less than what Republicans originally wanted: a 10-year cap on spending at the levels of fiscal year 2022.[5]

They didn’t get anything close to that, however. In 2025, non-defense spending can increase by 1% over 2024 levels, and in subsequent years there are no caps at all…only spending targets.[6]

There are other spending “cuts” in the deal, as well. For one thing, the suspension of student loan payments will be coming to an end. That suspension has been in place for about three years, but after August those with loans outstanding will be required to resume making payments.[7]

Republicans also were able to get White House negotiators to agree to a provision of the debt-ceiling agreement whereby unspent COVID relief funds would be “clawed back.” According to the Congressional Budget Office, that’s worth around $30 billion.[8]

Republicans also sought to cut spending by bolstering and otherwise adding work requirements to select entitlement programs – but their success to these ends was mixed.

For example, the GOP tried to secure work requirements for able-bodied Medicaid recipients as part of a debt-ceiling deal. They were unsuccessful, however.[9]

They were able to claim a “win” in the augmenting of work requirements for those eligible to receive Supplemental Nutrition Assistance Program (SNAP) benefits. Until the new debt-ceiling agreement, there had been no work requirement for SNAP recipients 50 and older. However, as a part of the new deal, that age threshold has been raised to 55.[10]

Republicans extracted other spending-cut concessions from Democrats, as well, including a rescission of $1.4 billion from the $80 billion in funding granted the IRS as a provision of the Inflation Reduction Act.[11] Note, however, that the GOP was originally shooting for a reduction of $71 billion from the IRS’s funding.[12]

Here’s what the new debt-ceiling agreement is, then: An accord to suspend the debt ceiling – and eliminate the risk of default – until the beginning of 2025…with a measure of spending cuts thrown in.

But here is what it is not, according to some: A meaningful resolution of the fiscal circumstances that have led to an ever-increasing federal debt now over $30 trillion. And that, some are saying, could be an issue in the future.

Reuters: New Deal “Does Little to Slow Massive Buildup of Total Federal Debt”

Last Monday, Reuters journalists David Lawder and Andy Sullivan published an analysis of the debt-ceiling agreement last Monday suggesting that the value of the deal in improving the country’s fiscal outlook is effectively inconsequential.

“Republicans and Democrats are touting a hastily-written debt ceiling deal that staves off a devastating U.S. default,” the piece begins, “but does little to slow a massive buildup of total federal debt now on pace to exceed $50 trillion in a decade.”[13]

The principal problem, Lawder and Sullivan write, is that the deal doesn’t limit spending in a way that beneficially impacts America’s prospective fiscal future.

The pair point out that the spending cuts, such as they are, address non-defense discretionary spending only, which accounts for no more than about one-seventh of the $6.4 trillion budget for fiscal year 2023.[14]

Overall, the savings projected to be realized by the deal’s cuts in non-defense discretionary spending amount to roughly $1.3 trillion over the next decade, according to the Congressional Budget Office (CBO).[15] However, according to the CBO’s Budget and Economic Outlook: 2023 to 2033 published in February, annual budget deficits are projected to average $2 trillion per year through 2033.[16]

Even the relatively modest $1.3 trillion in projected savings is not assured. Lawder and Sullivan note that Congress has the opportunity to walk away from these “self-imposed spending limits” inside of two years.[17]

“If you’re worried about the deficit and debt problem, this thing does nothing,” said Dennis Ippolito, a public policy professor and fiscal expert at Southern Methodist University, who was quoted for the Reuters article.[18]

A well-known feature of the debt-ceiling negotiations is that both Democrats and Republicans agreed that neither Social Security nor Medicare costs – referred to as “the main drivers of U.S. debt” by Lawder and Sullivan – should even be considered for any spending cuts; this despite the fact that together those two entitlement programs account for nearly 40% of federal spending.[19]

Hedge Fund Legend: Debt Deal “Best One Could Expect” but “Not Good Enough”

Ray Dalio, founder of world’s-largest-hedge-fund Bridgewater Associates, has been publicly expressing his doubts about the debt deal as a consequential remedy for the nation’s long-term fiscal ills.

At the time the deal was announced, Dalio called it “the best one could expect,” but added that it’s “not good enough” in his view.

“Dealing with the problem of adding too much to a pile of debt that is already too large: Grade D,” Dalio said. “It won’t make much difference.”[20]

Around the time the most recent debt ceiling was reached in January, Dalio criticized the very concept of a ceiling, saying that “there is no real debt limit because what is called a debt limit never actually limits the debt.”[21]

When the deal was still pending a few weeks ago, Dalio reiterated that opinion, saying, “Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt.”

Dalio suggested this routine “will eventually lead to a disastrous” fiscal event.[22]

“Why? Because spending more than one earns and financing it with debt, which we have been doing for a long time, is easy, pleasurable, and not sustainable,” Dalio warned.[23]

That said, the hedge fund legend did praise both President Biden and House Speaker Kevin McCarthy for being able to negotiate the deal they did.

“The middle held together against the extremists in their parties,” Dalio said. “That’s a big thing.”[24]

Still, the matter of future fiscal sustainability to which Dalio referred is viewed as “a big thing,” as well. And he’s not the only one who thinks so.

“Current Fiscal Path Is Unsustainable,” Says Treasury Department

As it happens, even elements of our own government are unconvinced of the nation’s long-term fiscal sustainability.

Phillip Swagel, director of the CBO, is one example. Upon publication of the Budget and Economic Outlook: 2023 to 2033 in February, Swagel flatly said to reporters at a press conference that the nation’s “fiscal trajectory is unsustainable.” He added that it would be practically impossible to change that trajectory without engaging in meaningful reform of Social Security and Medicare – reform that both Democrats and Republicans continue to avoid.[25]

Just a handful of days ago, the Government Accountability Office published a study on the nation’s fiscal outlook in which it explicitly referred to that outlook as “unsustainable” throughout the study summary.[26] A few months before that, in February, the Treasury Department published its Financial Report of the United States Government – Fiscal Year 2022 which at one point flatly declares, “The current fiscal path is unsustainable.”[27]

The issue of the debt ceiling is settled for now. You likely won’t find many who aren’t glad it has been resolved before Uncle Sam was forced to begin defaulting on his obligations. The “catastrophe” that Treasury Secretary Janet Yellen repeatedly warned would result from a default thankfully was avoided.[28]

It seems, however, that the nation’s fiscal future remains as potentially “unsustainable” following the debt-ceiling deal as it was before an agreement was reached. If that is in fact the case, then it seems reasonable to speculate even more work could be required from our nation’s leaders – on both sides of the political aisle – in the years ahead. It’s worth keeping an eye on this situation and staying up to date on the latest efforts to solve the problem.

 

……..
[1] Clare Foran, CNN.com, “Biden signs debt ceiling deal into law, averting historic default” (June 3, 2023, accessed 6/8/23).
[2] Rafael Nam, NPR.org, “U.S. hits its debt limit and now risks defaulting on its bills” (January 19, 2023, accessed 6/8/23).
[3] Foran, “Biden signs debt ceiling deal into law.”
[4] Kathryn Watson, CBSNews.com, “What’s in the debt ceiling deal — and what’s not” (June 2, 2023, accessed 6/8/23).
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] Ibid.
[11] Fatima Hussein and Kevin Freking, ABCNews.com, “Debt limit bill gives Republicans IRS cuts, but Democrats say they expect little near-term impact” (June 1, 2023, accessed 6/8/23).
[12] Watson, “What’s in the debt ceiling deal.”
[13] David Lawder and Andy Sullivan, Reuters.com, “Analysis: Debt ceiling deal ignores US debt time bomb” (June 5, 2023, accessed 6/8/23).
[14] Ibid.
[15] CBO.gov, “CBO’s Estimate of the Budgetary Effects of H.R. 3746, the Fiscal Responsibility Act of 2023,” (May 30, 2023, accessed 6/8/23).
[16] CBO.gov, “The Budget and Economic Outlook: 2023 to 2033” (February 2023, accessed 6/8/23).
[17] Lawder and Sullivan, “Analysis: Debt ceiling deal ignores US debt time bomb.”
[18] Ibid.
[19] Ibid.
[20] George Glover, Business Insider, “Billionaire investor Ray Dalio gives the US debt deal a D grade, warning it doesn’t solve the main problem” (May 31, 2023, accessed 6/8/23).
[21] Ibid.
[22] Ray Dalio, LinkedIn, “What Should Be Done About the Debt Ceiling Argument Between the Democrats and Republicans?” (May 18, 2023, accessed 6/8/23).
[23] Ibid.
[24] Glover, “Billionaire investor Ray Dalio gives the US debt deal a D grade.”
[25] Victor Nava, New York Post, “CBO projects US will add $19 trillion to the national debt in the next decade” (February 16, 2023, accessed 6/8/23).
[26] GAO.gov, “THE NATION’S FISCAL HEALTH: Action Needed to Address Projected Unsustainable Debt Levels” (June 6, 2023, accessed 6/8/23).
[27] Treasury.gov, “Financial Report of the United States Government – Fiscal Year 2022” (February 16, 2023, accessed 6/8/23).
[28] CBSNews.com, “Yellen: U.S. default would be economic and financial ‘catastrophe’” (May 11, 2023, accessed 6/8/23).
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