The debt limit deal would reduce government spending by about $1.5 trillion
The debt limit deal would reduce government spending by about $1.5 trillion
This week, the nonpartisan Congressional Budget Office took a look at the debt limit proposal and found that, if the deal becomes law, it would reduce government spending by roughly $1.5 trillion over the next 10 years.
And government spending certainly can influence the economy in a big way. Just look at what happened after the government increased spending during the pandemic and gave people relief checks, said Laura Veldkamp, an economics professor at Columbia: People went out and spent them.
“That is an increase in demand. Demand is when we go and buy things, and so this gave people money to do exactly that,” she said.
On the flip side, Veldkamp said that a reduction in government spending can reduce demand in the broader economy, which is what the Federal Reserve is trying to do by raising interest rates.
Government spending cuts could make the Fed’s job easier, she added. “If there’s less demand for things, if there’s fewer purchases, investments by business, that’s going to put less upward pressure on prices.”
The thing is, there is a lot of government spending that the debt ceiling deal does not cut. It focuses on capping discretionary spending — money the government uses to fund different agencies and programs.
And “discretionary spending is one-third of all government spending,” said Justin Wolfers, an economics professor at the University of Michigan. “And half of that is military spending, which Republicans didn’t want to touch.”
This week, JPMorgan and Goldman Sachs estimated that the deal would shave off just about a tenth to two-tenths of a percentage point from overall gross domestic product.
“It does slow the economy, but not in a particularly meaningful way,” Wolfers said.
To be clear, Wolfers added that that’s not a bad thing. After all, the economy might not need to slow down, pointed out Josh Bivens, chief economist at the Economic Policy Institute.
“Like, I think the unemployment rate we have today, I don’t think it’s too low. I don’t think it’s causing undue inflationary pressure; I think it’s mostly causing pretty good wage growth,” he said.
On the other hand, the deal’s expanded work requirements for certain benefits could cause fewer people to receive them.
“Essentially, you’re putting on additional administrative burdens for people to receive these benefits,” said Menzie Chinn, an economics professor at the University of Wisconsin.
And that part of the deal would have an outsized impact on more vulnerable parts of the economy.
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