Debt ceiling deal is not a victory, according to Philly-area economist

When President Joe Biden signed the absurdly titled Fiscal Responsibility Act of 2023 (FRA) into law on Saturday, he managed to prevent the first default in the history of the United States. Everyone involved is claiming victory.

As an economist, I have to wonder: Really?

It’s true now we can pay our bills for goods and services already contracted, and as a result, there will not be a massive recession. However, the fact that our political leadership has accepted that the debt ceiling can be used as a bargaining chip now greatly increases the likelihood of future battles and a default.

The numbers reflecting budget savings cited by the president and the Republican leadership, including House Speaker Kevin McCarthy, must be understood in the context of Washington budget calculations.

The FRA sets firm limits on defense and nondefense discretionary spending. That sounds good, but those are only for the next two fiscal years, not the 10 years that are being touted in estimates. After fiscal year 2025, there are “targets” for fiscal restraint, but they are not enforceable and, therefore, unlikely. Thus, the so-called savings that politicians have bragged about include those dubious deficit reductions. Without them, the impacts are significantly smaller.

Some real changes are being made in the short term. Most importantly, the debt ceiling is suspended until January 2025, which means the next battle over this issue will occur after the 2024 election. In addition, spending allocations for nondefense discretionary goods and services — which includes everything other than defense, Social Security, Medicare, Medicaid, and other critical programs — are limited to fiscal year 2023 levels in fiscal year 2024 and only a 1% increase in fiscal year 2025. This is where the largest spending restraints occur.

The nondefense discretionary spending programs may see serious inflation-adjusted cuts. However, they constitute less than 15% of the budget. Though overall spending growth will slow and the projected deficit will decline over time, the decrease will not be significant.

The second largest spending decline will result not from cuts in programs, but from interest payment reductions due to the lower projected national debt levels. Since future (post-2024) Congresses and presidents are not subject to these spending limitations, those future benefits will rely on our elected officials showing fiscal restraint. Good luck with that.

As for the high-profile politics-driven changes, they will have little deficit-reduction impacts. Indeed, some actually lead to higher deficits.

Ending the student loan payment moratorium has no impact as there is no government spending. Clawing back $20 billion of the IRS budget increase has a small initial outlay effect.

But no good deed goes unpunished. The Congressional Budget Office has estimated that for every additional dollar given to the IRS, revenues would rise by between $6.40 and $7.10. Thus, the deficit could increase when the lost revenue recovery activities are factored in.

The tightened work requirements on those who receive food stamps through the Supplemental Nutrition Assistance Program, known as SNAP, are also a loss-leader. Veterans, people experiencing homelessness, and those who were children in foster care would now be exempt from work requirements, expanding the SNAP program overall. Still, a significant number of people in the 54-to-56 age group currently receiving SNAP benefits will lose funding.

» READ MORE: SNAP work requirements are changing. Here’s how it could affect the Philadelphia region.

Considering all the impacts, the Congressional Budget Office found that the legislation could reduce spending over the 10-year horizon by about $1.5 trillion, which McCarthy touts as the biggest reduction in history. Actually, he used $2.1 trillion, but that assumes all the future budgets during the next 10 years reflect the suggested limits on spending authority. Sure, right.

Regardless, the headline spending-reduction number, be it $2.1 trillion or $1.5 trillion, is eye-opening. So, why should they be dismissed?

If you look at the two years where the agreement is likely to somewhat resemble the political claims, the reductions would be about $245 billion for appropriations (ability to spend) and $200 billion for outlays (actual spending in those two years). Those declines are not trivial, but in the context of a $32 trillion debt, they don’t represent much heavy lifting.

And then there are some “side agreements” that were not part of the formal package but are expected to be part of the budget-making process going forward. These do things such as shift money around so that savings in one part of the budget are used to fund other parts of the budget.

There are also agreements to increase spending on certain nondiscretionary programs that were supposed to be cut in the debt ceiling bill. The Committee for a Responsible Federal Budget estimates the side agreements would cut the FRA savings from the $1.5 trillion the Congressional Budget Office estimated to $1 trillion over 10 years.

Finally, the $1 trillion savings assumes Congress will not simply disregard the nonbinding guidelines in the bill. Nonbinding means it doesn’t matter, especially since emergency spending bills are still allowed. When it comes to reelection, spending is always an emergency. In two years, we will be looking toward the future, not what was agreed upon in June 2023.

Clearly, funding interest payments on the debt is a serious concern, especially given current interest rate levels. Nevertheless, even if we get $500 billion in savings over 10 years, which is optimistic, it isn’t as much as it sounds. The Congressional Budget Office has projected that outlays over the next 10 years could be in the $80 trillion range, meaning the savings represent only 0.6% of total spending. And when it comes to 10-year forecasts, that’s basically a rounding error.

For very little real financial gain, the debt ceiling was used as a political weapon, something no responsible politician should ever do. A U.S. default would devastate not just the U.S. economy but likely send the entire world into a deep recession. Unfortunately, as we have just seen, that weapon has been unleashed.

Joel L. Naroff is the president and founder of Naroff Economics consulting firm in Margate.