What the Debt Ceiling Deal Means to You – Top 3 Takeaways – May 30th, 2023
- What’s in the deal? The devil is always in the details, right? Over the weekend we heard that a deal in principle was done between President Biden and House Speaker Kevin McCarthy. So done in fact that the 99-page legal framework for the deal was published on the House website for Congress and the most diligent, or perhaps machoistic among us to read. The Biden-McCarthy deal is one thing. Gaining Congressional approval in both chambers is more than a mere formality. Having this level of transparency, for members of Congress to read and digest prior to calling for a vote, is both rare and a sign of Kevin McCarthy’s leadership in the House – which stands in obvious contrast to Pelosi before him, but also Republicans Ryan and Boehner before her. The macro demands for Republicans heading into negotiations were generically specific. That sounds like an oxy-moron – but it’s accurate. The broad demands were like this. We’re spending way too much, it isn’t sustainable, and it’s exacerbating inflation – therefore there must be net spending cuts. Those spending cuts needed to come in the form of discretionary spending – not out of defense spending (which is the only federally mandated spending which constitutionally exists). Did that happen? Yes. In the framework what’s outlined is a net spending reduction in discretionary spending by just under 1%, with defense spending increasing 3% over the next year. That might not sound like much, and in the grand scheme of how rapidly government spending increased during the pandemic it perhaps isn’t, however...
- The cuts are more significant than they sound. The dollar in your pocket today doesn’t come close to buying what it did a couple of years ago does it? In fact, the dollar in your pocket today is worth 5% less than it was worth even a year ago today. When you consider that inflation is still running at 4.9% most recently, a >1% net decrease in discretionary spending has the real-world impact of about a 6% decrease in discretionary spending. That 3% increase in defense spending – works like a 2% decrease in today’s dollars as well. In other words, while many would have liked to have seen deeper cuts to keep spending in line with revenue, what’s in the plan are both net and inflation adjusted cuts which is probably about the best Kevin McCarthy could get given that Democrats control two-thirds of the federal government. So, about the details of the deal. Here are the big picture takeaways... If the deal goes through the debt ceiling will be suspended until January of 2025. What that means is that this spending plan would be the plan until the next Congress is sworn in and perhaps a new president as well. That means no more debt ceiling drama before the elections, clarity for the financial markets, and the US AAA credit rating remaining intact. As mentioned, the lone area of increase is in defense spending which will rise at a level that was already in line with previous projections. IRS cuts are coming. Remember the Democrat plan to use $80 billion to hire an army of new IRS agents as part of the last year’s not-so-Inflation Reduction Act? The $20 billion allocated over the next two years as part of that plan would be wiped out. That was one of the top Republican wish list items and it’s achieved in this deal. The COVID clawback would occur. State and local governments which hadn’t appropriated COVID slush fund money stand to lose it. The estimated savings associated with the clawbacks is $60 billion. New work requirements would be implemented for those who receive SNAP. In a move back towards the 90’s era welfare reforms which had been dismantled by Democrats over the past decade, able-bodied Americans, up to the age of 54, would have work requirements as part of the process to continue to receive supplemental food assistance. There would be an increase in energy permitting across all types of energy. Week one Biden executive actions increasing regulations on the energy industry inhibiting the exploration and development of new domestic energy will be curtailed. The permit process for the development of new energy – regardless of type is to be streamlined – taking the regs essentially back to pre-Biden levels (though bans on harvesting of energy on federal land implemented by President Biden remain). And there’s one other somewhat wonky provision that I'm huge fan of and frankly the one I believe the entire government should act under...
- Paygo. We all must live within our means. Shouldn’t the government we’re taxed to finance be forced to live within its means? It’s not the craziest concept running, is it? Anyway, the bill states that any government agency spending, above and beyond what is outlined in this new budget framework agreement, must be offset by reductions in spending elsewhere. In other words, Biden can’t get a wild hair, plugs or no plugs, declare an emergency and start spending new money without full Congressional authorization. Budget stuff, debt ceiling stuff, is wonky stuff and largely outside of the realm of what most of us want to worry about. That said, it impacts all of us three ways. First through inflation, second through what we must pay in future taxes to support it and third through the added pressure unsustainable debt obligations place on programs we’re entitled to – a la Medicare and Social Security which will require fixes in coming years. A more sustainable debt situation today helps reduce a bit of the pressure on those types of programs tomorrow. And in real dollar terms what does it mean? By my estimate, if this becomes law, the deal will lower the per capita tax burden by $243 over the next two years and the average household tax burden by $652. That’s not including the future interest savings by not spending even more money our country doesn’t have. So that’s in a nutshell what this deal means to you. Along with less pressure on inflation going forward. Is it great? No. But then again having Joe Biden as president isn’t either – so better is something. And this deal is better than what’s been.