On the night before the US Treasury was projected to exhaust its borrowing authority and risk defaulting on its financial obligations, Congress finally agreed to end the partial government shutdown and to temporarily suspend Treasury borrowing limits. Congress set itself a deadline of 13 December to come up with a budget for the 2014 fiscal year.
The debt ceiling has been suspended until 7 February 2014. But unless it is raised again soon after that, the Treasury will probably run out of effective borrowing authority sometime between March and May.
The legislation passed in October does not directly raise the debt ceiling. Instead, it permits the President to suspend it. But that is a one-time event. President Obama does not have continuing authority to suspend the ceiling. If Congress wants to use this manoeuvre again it must pass specific legislation granting new authority to the President.
The chances of a ‘grand bargain’ between Republicans and Democrats that leads to a long-term agreement on deficit reduction and tax reform are slim in our view. Eight weeks is too short a time for Congressional negotiators to agree on issues that have been at stalemate for the past year.
It is more likely that a series of piecemeal deals is struck that sets 2014’s spending level modestly higher than that allowed by the sequestration process that limits government expenditure. Smaller sequester spending cuts would have to be offset with future reductions or revenue gains elsewhere in the longer-term budget projections.
The legislation passed in October does not directly raise the debt ceiling. Instead, it permits the President to suspend it
A series of compromises should allow a budget to be put together that sets overall spending somewhere between the USD1,058 billion the Democrats desire and the USD967 billion target from the Republicans.
The House Republicans’ budget resolution envisions severe spending cuts for many social programmes that the Senate Democrats will vigorously resist. To counter that, the Democrats may insist on steep cutbacks for the Defence department. But in the end, each side may compromise just to protect the current level of spending for the programmes they favour rather than insist on deep cuts in the programmes they dislike.
But even if the 13 December deadline is breached, we do not expect a repeat of the stalemate that led to October’s partial government shutdown. Little was accomplished and much was lost in terms of damage to the economy’s growth. We think it unlikely Congress would want to antagonise voters again, especially in an election year.
The same is true for the debt ceiling. Not allowing an increase turned out to be an empty threat. The consequences of pushing the Treasury into default would clearly be so devastating that it could not be permitted. In the end, the threat had to be withdrawn.
The US economy’s growth will be dented in the final quarter of 2013 because of the 16-day government shutdown. We calculate GDP growth will be about 1.9 per cent compared to our previous estimate of 2.4 per cent because of the loss of government output and the indirect effects to business and consumer confidence.
But the disruption caused by the shutdown and worries over a Treasury default should be temporary, so we are not changing our forecast for 2014 GDP growth, which we still expect to be about 2.3 per cent.
The Federal Reserve was anxious to scale down its quantitative-easing programme before the government shutdown. However, if Congress fails to forge a budget agreement by 13 December, and if economic data show less than a vigorous rebound from the disruption caused by the shutdown, the Fed may well delay starting quantitative easing tapering until sometime in the first quarter of 2014.
This research was first published on 17 October 2013.