A sweeping plan Republicans are moving quickly to pass this week that would raise the nation’s debt limit, along with a list of party-backed proposals to curb spending, could increase the chances of an economic downturn, a recent analysis from Moody’s Analytics found.
In a report released this week, economists Mark Zandi and Bernard Yaros seek to assess what they characterized as the “macroeconomic consequences” of House Republicans’ Limit, Save, Grow, Act of 2023.
“While the economy skirts recession in both scenarios, recession risks are uncomfortably high, with a consensus of economists and many investors and business executives expecting a downturn beginning late this year or early next,” they state in their report. “The timing of the government spending cuts in the Limit, Save, Grow Act is thus especially inopportune as it would meaningfully increase the likelihood of such a downturn.”
“Indeed, under the legislation, GDP growth is so weak that employment declines in the first three quarter of 2024, and the unemployment rate rises by more than a percentage point to 4.6% by the fourth quarter of 2024,” the analysis continues. “Compared with the Clean Debt Limit scenario, by year-end 2024, employment is 780,000 jobs lower, and the unemployment rate is 0.36 percentage point higher.”
Under the plan rolled out by GOP leaders last week, government funding hashed out by lawmakers annually as part of the appropriations process would be capped at fiscal year 2022 levels. The bill also seeks to limit growth spending growth to 1 percent annually over the next decade.
Among other proposals to cut spending, Republicans introduced measures that would back several Biden administration actions on student loans and beef up work requirements for government assistance programs.
The bill comes as lawmakers are expected to only have until sometime in the summer to raise the debt limit, which restricts how much the U.S. government can owe to cover the nation’s bills, or risk a federal default — which experts warn could yield devastating effects for the economy.
The cap was last raised to roughly $31.4 trillion in 2021. But after the national debt ran up on that amount earlier this year, the Treasury Department began implementing what it called “extraordinary measures” to stave off a federal default.
Democrats have called for a “clean” bill to raise the debt ceiling, while pushing for bipartisan budget talks to be carried out separately from debt limit negotiations. Republicans have drawn red lines around raising the debt limit without significant fiscal reform, pointing to high inflation and rising interest costs on the national debt.
But experts caution in the recent analysis that “significant government spending cuts” proposed in the bill could give way to “substantial headwinds to nearterm economic growth.”
“The cuts reduce nondefense outlays by $120 billion in fiscal 2024 compared with the Clean Debt Limit scenario, equal to about half a percentage point of GDP,” the analysis states. “The multipliers on this spending—the change in GDP a year after a change in spending—are estimated to be just over 1, as the programs suffering budget cuts are essential government services and tend to benefit lower-income households that quickly spend any support they receive from the government.
“Cushioning the negative near-term economic consequences of the legislation are lower interest rates,” the report continues. “The Federal Reserve begins to lower interest rates late this year soon after the passage of the legislation given the weaker economic growth and heightened recession risks.”
They also said long-term Treasury yields would be lower, in part, because of the “weaker economy,” but also “because of prospects for smaller long-term budget deficits and a lower government debt load.”