the money game

All That for $46 Billion?

Photo: Kevin Dietsch/Getty Images

If Kevin McCarthy had had his way, he would have tanked the economy. Starting with a budget plan passed by House Republicans back in April — an opening bid that would have cut as much as $4.5 trillion from the budget — and going to recent weeks, when spiraling deal talks threatened to cause the U.S. to default, the bids from Republicans in this year’s round of budget negotiations have been precursors of economic calamity. The stakes had been especially high since the economy has been on unsure footing for the past year, as inflation and rising interest rates and a spate of collapsing banks have brought the U.S. closer than ever to a recession — and if the government had cut spending too drastically, it would have almost certainly meant a downturn. Since federal spending is a little less than a third of the entire U.S. GDP, McCarthy’s budget would have immediately shrunk the economy, as agencies across the government had to cut billions in spending and hiring. After the details of the deal started to leak out this past weekend, though, it’s apparent that that won’t happen. The big-picture impact on the economy from the two-year deal between Joe Biden and McCarthy is going to basically be nil.

First, let’s get some perspective on what this deal will actually do to the economy. What it won’t do is important: It won’t impact spending on most federal assistance programs, such as Social Security, Medicare, and Medicaid. Overall, it keeps spending for nonmilitary budgets basically frozen. After that, there’s a one-percent-increase cap on the fiscal 2025 budget. One of the biggest cuts is about $30 billion in COVID relief funds that is getting clawed back — less than one percent of the roughly $5 trillion in pandemic stimulus spent since 2020 — but this is money that was essentially sitting on the sidelines anyway. The IRS is going to lose about $21.4 billion in new spending over two years. However, $20 billion of that is going to be reallocated to other agencies, not taken out of the budget altogether. However, it still has $60 billion more than it did prior to the passage of the Inflation Reduction Act. Other known provisions, around work requirements and energy-deal permitting, don’t really have much of an effect on spending.

How much of a cut does that amount to? Goldman Sachs’s chief economist, Jan Hatzius, estimates that it’s around 0.1 to 0.2 percent of the annual GDP (or about $46 billion or so) max. But when you take into account the giant increases that Biden had already managed to pass — primarily with the $2.2 trillion Inflation Reduction Act — the “overall discretionary spending is likely to be slightly higher in real terms next year despite the new caps,” he wrote in a Monday note. Mark Zandi, chief economist at Moody’s Analytics, agreed that it would have a modest impact. “The timing is inopportune given how fragile the economy is, and how high recession risks are, but I don’t think this is what does the economy in,” he told Politico. Bond markets have basically accepted that this is a good deal.

Of course, it still has to pass through Congress and get signed into law. But the reality here is that this budget is more of an expression of continuity than it is one of any real change. It’s fair to see this budget as a lopsided victory for Republicans given that there are no tax increases and nothing in it that’s new for Democrats. But this is missing some context here, in that last year’s $2 trillion Inflation Reduction Act was already flooding federal programs with new money. Take a look at the IRS funding. Biden’s bill was expected to add $80 billion to the tax agency’s budget over the next ten years — much of which would have gone toward enforcement for wealthy tax avoiders. But even with $21 billion cut, this still could leave intact the entire $47 billion that it was planning on spending. And that’s not even factoring in the question of time. Federal agencies don’t change rapidly. The IRS’s budget has been about $14 billion for ten years. Are there really that many forensic accountants banging on the IRS’s door for jobs? You can’t dump money on an agency and expect everything to change at once.

The other reality here is that this is just the deal for right now. After the bruising 2011 debt-ceiling fight that led Standard & Poor’s to downgrade the U.S. debt, then-Speaker John Boehner declined to have the same fight in 2013. Instead, he opted to pass a clean increase and move on. In the years that followed, the 2011 spending caps were raised. Washington continued on in its normal fashion. This deal averts calamity for right now. If there’s serious damage, there’s every reason to believe that Congress can just go back and undo it.

All That for $46 Billion?