The US Congress wants to suspend the national debt ceiling in exchange for spending restrictions

The U.S. Congress is preparing to approve a bill that would allow the country’s debt ceiling to be suspended until January 1, 2025 in exchange for spending cuts. Such an agreement was reached by US President Joe Biden and Speaker of the House of Representatives Kevin McCarthy after the US Treasury Department warned of the exhaustion of reserves to cover expenses by June 5. According to experts, the national debt ceiling will be raised without pronounced consequences for the US economy – non-defense spending will remain at its current level in the next two years.

The US Congress this week is considering a bill to raise the national debt ceiling (Fiscal Responsibility Act), agreed on the eve of Joe Biden and Kevin McCarthy. A vote is scheduled for Wednesday in the House of Representatives, in which the majority of seats are occupied by Republicans, after which the Senate (in which the majority are Democrats) must approve the document. The Committee on Rules of Procedure of the lower house on the eve approved the submission of the bill to the vote – seven votes were cast in favor, six against.

The deadline for resuming borrowing, according to the US Treasury, is June 5.

Without raising the debt limit, the agency will not be able to make planned social payments, wrote in a letter to congressmen dated May 26, the head of the department, Janet Yellen. In it, she pointed out that the uncertainty around the situation with public debt has already led to an increase in the required yield on short-term bonds. To clarify, the current level of the debt ceiling of $31.4 trillion was exceeded back in January, after which the country’s Ministry of Finance used reserves and “extraordinary measures” (including swaps) to cover expenses.

The agreed bill provides for the suspension of the ceiling until January 1, 2025 – such a period will allow postponing the solution to the debt burden problem until the US presidential election and the formation of a new Congress (in fact, the problem of the limit may arise no earlier than August-September 2025). At the same time, the 99-page act details the limits for various categories of expenses. In particular, in fiscal year 2024 (beginning on October 1 this year), defense spending should not exceed $886 billion, and other spending should not exceed $704 billion. For 2025, these limits are set at $895 billion and $711 billion, respectively.

Excluding veterans’ benefits, non-defense spending will remain virtually unchanged – Kevin McCarthy called the deal historic, as it provides for the first (albeit nominal) reduction in non-defense spending in ten years.

Spending on key social insurance programs – Medicaid and Medicare – remained unchanged, as did the already approved measures to support the transition to clean energy sources as part of the inflation reduction act. The new act also contains a clause that the Ministry of Finance will not be able to borrow funds “in reserve” pending the expiration of the suspension of the ceiling.

According to the assessment of the Council of Economic Advisers (Council of Economic Advisers, a group of academic economists under the President of the United States), which was cited by the White House, the inability of the Treasury to pay off its debt obligations and the subsequent default would lead to a reduction in US GDP by 6.1% (in the case of a short-term default – by 0.6%), including due to the fact that the government could not initiate counter-cyclical support measures. The main consequence of such a scenario would be a sharp increase in the cost of borrowing, including for the private sector (usually corporate issuer ratings are downgraded following country ones).

The concluded deal will not have any significant effect on macroeconomic parameters, and the change in GDP from some restriction of government spending will not exceed 0.1%, Capital Economics experts estimated. They note that non-defense spending will remain almost unchanged over the next two years, while defense will increase by 3% in fiscal year 2024. These caps are lower than Joe Biden’s budget plan, but well above the original Republican demands.

Tatyana Edovina