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June 2023 / VIDEO

U.S. Debt Deal Does More Than Avoid Default

Key Insights

  • Relative to recent years, the debt deal will slow the rate of growth in government spending for the next two years.
  • The deal may mark the start of a new era where fiscal spending grows more modestly.
  • The market may not fully appreciate the potential for bipartisan legislation in the runup to the next presidential election.


I'm Michael Pinkerton, the Washington analyst for T. Rowe Price, where I interpret news coming out of D.C. for our investors in Baltimore.

We're probably looking at a fiscal drag over the next two years. What that means is fiscal spending will be a net negative for U.S. economic growth, as the bill put one-percentage-point caps on spending growth for the next two years, which is expected to be under the level of inflation and substantially lower than the prior two years.

I think this debt ceiling fight actually lays a marker in the ground that we could see a productive Congress between President Biden and Speaker McCarthy, where both sides see some incentives to get big deals done.

Both President Biden, who’d like to look productive and be reelected, and Republicans who want to have some issues to go home to and say we did this as the new House majority, now you should elect a president and another House and Senate majority in 2024. So I think, politically, it creates an environment of compromise. And I think that's sort of underappreciated by a lot of Washington analysts and the market as a result of this deal.

I think my first takeaway from this saga that the market doesn't seem to fully appreciate is just how narrowly we escaped default, but also how significant it is that we're in the era of big bipartisan deals once again, where cutting spending is the norm versus increasing spending.

So during the Trump era, typically you had a president who would propose budget cuts, but then at the end of negotiations, you would still see substantial budget increases because that was sort of the compromise that could be had between Democrats and Republicans in the 2017 era. We’re now entering a new era where you'll probably see those compromise spending bill agreements come to close to 1% or 2% spending increases or outright spending cuts. So we’re entering sort of a new era of modest spending growth and potentially modest austerity as well.

As the debt ceiling is no longer an issue but the budget process continues, we will keep all of our clients informed as issues in D.C. arise.


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