Spending Deal Removes Uncertainty, But Unlikely to Boost Growth
24 July 2019 - 8:04AM
Dow Jones News
By Kate Davidson
The spending deal congressional leaders announced this week
would remove a key source of uncertainty heading into a
presidential election year, but it won't translate into a big rise
in government spending, muting its impact on economic growth.
The two-year pact will prevent steep automatic spending cuts
from kicking in next year, which would have weighed on the economy.
But spending would rise only about 3.5%, or $44 billion, over 2019
levels, and only 0.8% the following year, well below the current
inflation rate. Overall, the pact would increase spending roughly
$320 billion above budgets caps enacted in 2011.
As a share of the economy, next year's increase is in line with
the rise in budget authority that Congress approved in the last
two-year deal, keeping the government on the same spending trend,
said Donald Schneider, an economist at Cornerstone Macro.
"That means we're keeping the fiscal impulse roughly steady," he
said.
The deal is also in line with what most private forecasters and
markets expected. Without a budget deal, the automatic spending
caps known as the sequester would have reduced discretionary
spending by 10% next year.
Though it only makes up about one-third of the federal budget,
discretionary spending -- the part of the budget Congress can
adjust -- includes many of the programs voters care about, such as
funding for the military, education, food safety, national parks
and cancer research. Though consumer spending is the biggest driver
of economic growth, federal spending is also a major component.
Ernie Tedeschi, an economist for Evercore ISI, estimates gross
domestic product will grow 2.4% in fiscal 2020 under the deal,
higher than the 2% growth expected if the sequester cuts had taken
effect, but is in line with what forecasters had already
expected.
The agreement, aside from lifting the spending caps, also
removes the threat of an impasse over raising the federal borrowing
limit. Without an increase, the U.S. could run out of cash to pay
its creditors by early September.
Senate Majority Leader Mitch McConnell (R., Ky.) defended the
spending increases in the deal, over which some fiscal
conservatives objected.
"I think it's the best we could have done in divided government.
The alternatives were much worse: a one year [continuing
resolution], a sequester, perpetual chaos," he said.
Federal Reserve officials, who are widely expected to cut
interest rates at their meeting next week, had flagged fiscal
policy as a source of economic uncertainty. The deal removes the
potential for debt limit drama this fall, suspending the borrowing
limit until July 31, 2021, though it likely won't alter Fed
officials' near-term policy plans.
The pact, which still must be approved by Congress and signed by
the president, also offered the latest evidence that lawmakers in
both parties are willing to tolerate much higher deficits to
advance their policy priorities, a stark reversal from the budget
austerity kick that consumed Washington under the Obama
administration.
The shift is happening as federal deficits and debt levels are
on track to soar in part due to the 2017 tax cuts and the higher
spending under the current budget deal. That comes despite sturdy
economic growth and a robust labor market, which typically lead to
smaller deficits. The White House Office of Management and Budget
estimated this month that the federal deficit will top $1 trillion
in fiscal 2019.
The deal would offset roughly $77 billion of the $320 billion in
new spending above the 2011 caps, about half of what fiscal hawks
in Congress and in the administration had sought. The Congressional
Budget Office estimated Tuesday the deal would add roughly $265
billion to deficits over the next decade, though the figure would
be much higher if spending levels continue on the same
trajectory.
The deal would also end the Budget Control Act, the series of
spending cuts that Republicans negotiated with President Obama in
2011 in an attempt to curb rising federal deficits. Congress has
effectively avoided the bulk of those cuts with previous two-year
budget agreements, in 2013, 2015 and 2018.
Write to Kate Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
July 23, 2019 17:49 ET (21:49 GMT)
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