U.S. debt ceiling deal won't reduce deficit much nor impact economy much

The nation appears to be on track to avoid an economic calamity. A last-minute debt agreement between President Biden and House Speaker Kevin McCarthy (R-Calif.), forged over the weekend, has families and business owners optimistic that lawmakers will pass a deal in time to prevent a catastrophic default.

The proposed deal would raise the federal debt ceiling, allowing the government to borrow more to pay its obligations. It would also fund the government for the next two years. But how would this bipartisan deal affect households, businesses and the overall economy? Experts weigh in with five takeaways.

Debt ceiling deal: Here is what's in and what's out

Despite months of pointed debate, the debt ceiling deal is expected to do little to bring down the U.S. deficit, which is the gap between the government's income and its spending in a given year.

The agreement would cut spending by $1.5 trillion over the next 10 years, according to a Congressional Budget Office analysis released Tuesday. The deficit reduction for 2024 is expected to be about $70 billion, in addition to $4.4 billion in deficit reduction for the rest of 2023.

Those savings wouldn't balance out the country's largest expenses, which include Social Security, Medicare and the military, which haven't been touched in the deal. Those spending areas totaled $4.9 trillion, or 77 percent of last year's budget, and were considered off-limits from the negotiation and will continue to fuel deficits over the next decade.

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Instead, proposed spending caps are limited to "nondefense discretionary spending," a category that includes funding for education, national parks and scientific research and makes up less than 15 percent of the $6.3 trillion the United States spent in the last fiscal year. Spending on such programs would fall by $1 billion next year and rise by 1 percent in 2025, according to a White House official.

Think you can tame the national debt? Play our budget game.

In all, the impact of those measures on the economy's growth is expected to be marginal, contributing to a reduction in the annual deficit by "a few tenths of a percentage point," according to analysts at Deutsche Bank. Since October, when fiscal year 2023 began, the federal government has spent $925 billion more than it has collected, according to the Treasury Department.

Still, the Committee for a Responsible Federal Budget, a Washington think tank that advocates deficit reduction, praised the plan as "the first major deficit-reducing budget agreement in almost a dozen years."

Student loan repayments have been on hold since March 2020, costing the government roughly $5 billion a month in lost revenue. If passed, the debt agreement would require some 43 million Americans to resume payments in September, slightly earlier than expected.

As a result, households could see a $40 billion reduction in disposable income, estimates Joseph Brusuelas, chief economist for consulting firm RSM US. That could quickly blunt Americans’ spending power, especially at a time when many families are struggling to keep up with high inflation on necessities like food and gas.

"These aren't trivial payments, so it can't be good for demand," said Claudia Sahm, founder of Sahm Consulting and a former Federal Reserve economist. "It means families will have less discretionary money in an environment where inflation is still high and costs are rising."

The debt ceiling deal includes changes to nutrition programs, including new work requirements for adults who receive help through Temporary Assistance for Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP). Beyond those changes, the deal creates a spending cap on the Special Supplemental Nutrition Program for Women, Infants and Children (WIC), $615 million short of government estimates for what is needed to feed new mothers and pregnant women and their young children in the next fiscal year.

"The drastic gap in WIC funding is worrisome, particularly when families are facing high food costs and already struggling to put healthy foods on the table," Jamila Taylor, president of the D.C.-based National WIC Association, said in a statement. "The funding gap resulting from this deal — which favors defense programs at the expense of investments that serve families and communities — puts WIC at risk of being unable to meet the increasing demand for its services."

One byproduct of weaker government spending: fewer jobs.

A pullback at the federal level would trickle down to businesses, causing them to curb hiring. As a result, families would spend less, further weakening demand for goods and services.

Overall, new spending caps could cost the economy about 150,000 jobs by the end of next year, according to estimates from Mark Zandi, chief economist at research firm Moody's Analytics. That would be enough to push up the unemployment rate by about one-tenth of a percentage point. The current rate, at 3.4 percent, is near historic lows.

"Now, that's not great," Zandi said at a Washington Post Live event this week. "I mean, the economy is struggling. Recession risks are high. If I were king, this isn't what I would do, but 150K in the grand scheme of things is manageable."

There are protections in place to keep unemployment from rising too much. If the economy were to go into a recession in the next two years, the government could boost social assistance programs, food stamps and unemployment insurance, according to Brusuelas, the RSM US economist.

"We do not see the debt ceiling agreement as imposing any real spending restraint that would tip the economy into recession," Brusuelas wrote in a research note. "The agreement's impact on economic growth will most likely be negligible over the next two years."

Although parts of the debt agreement could weigh heavily on families and businesses, the deal is expected to have little, if any, fallout for the nation's economy. Estimates vary, but Gregory Daco, chief economist at consulting firm EY-Parthenon, wrote that he expects the spending caps could drag down overall economic growth by a "modest" 0.3 percent next year.

"On a personal level, this is a big deal for individual hardship and safety nets, on principle," said Sahm, the former Federal Reserve economist. "But big picture, this isn't a game changer for the economy."

However, that pales in comparison to the global catastrophe — and near-certain recession — that would be likely if the United States doesn't forge a debt ceiling deal in time. In that scenario, Daco expects that a recession would wipe out 5 percent of the country's economy.

As debt ceiling negotiators finalize deal, the nation watches anxiously

Zandi predicts that a U.S. default could lead to as many as 8 million job losses and $10 trillion in lost household wealth. The alternative — a bipartisan deal that would hopefully stave off a fiscal crisis, he said, is a much better outcome for the economy.

"I’ll have to say it's about as good as it gets. I mean, given all the various scenarios that could have played out here, I do think this is a reasonably good ending to the story," he said Tuesday. "Hopefully, it is the ending and they get this across the finish line in the next few days and pass a piece of legislation that the president can sign."

Jeff Stein and Tobi Raji contributed to this report.

The latest: The House and Senate passed a debt ceiling deal as lawmakers rush to avert a disastrous government default on June 5, sending the bill to President Biden to sign into law. See how each member of the House and Senate voted. If the debt ceiling isn't raised by the deadline, here's what a government default means and the payments at risk.

Understanding the debt ceiling fight: Biden and the House Republican leadership have been on a collision course over the national debt limit. In this comic, see how hitting the debt ceiling could unleash chaos. Here's when the debt ceiling battle could end.

What is at stake? Invoking the 14th Amendment to dodge the debt limit is risky, White House officials say, although Biden has floated it as an option. If the debt limit is breached, Biden warned that it could send the U.S. economy into a free fall. Amid consumer anxiety over the uncertainty, financial experts warn against making fear-based decisions.