Debt Ceiling Deal: Key Takeaways

Debt-ceiling negotiations seemed to reach a viable compromise over the weekend — but the risk remains of partisan dissent or procedural missteps delaying a bill’s passage beyond the U.S. Treasury’s ability to meet its commitments. We are watching events closely and continue to emphasize the importance of planning as a bulwark against short-term, emotionally driven decisions in times of volatility and uncertainty.

Republican leadership and the White House spent the weekend securing bipartisan support for a deal that would avoid a U.S. default. While the path of legislation remains uncertain, members of both parties have expressed confidence in the likelihood of its passage. If successful, the bill could be signed into law before the June 5 X-Date, or when the government is estimated to no longer be able to pay its bills.

As usual, compromise means that nobody is getting exactly what they wanted. Elements of the 99-page Fiscal Responsibility Act, which suspends the $31.4 trillion debt ceiling until Jan. 1, 2025, after the next presidential election, include:

• A two-year cap on federal spending, resulting in defense spending of $886 billion in 2024 and $895 billion in 2025. Non-defense discretionary spending is limited to $704 billion and $711 billion respectively. The reduction in planned spending over the next 10 years is anticipated to save as much as $2 trillion.
• The claw back of roughly $28 billion in unspent COVID relief funds.
• The elimination of $1.4 billion in planned funding for the Internal Revenue Service, with an additional $10 billion of the IRS’s planned funding increase slated to be re-allocated to other non-defense discretionary spending this fall, and again in 2024.
• Restarting federal student loan payments after Aug. 30, ending the payment hiatus that began during COVID. Notably, the proposal does not impact President Joe Biden’s plan to potentially forgive up to $20,000 in student loan balances, which remains under review by the U.S. Supreme Court.
• Gradually adding work requirements to qualify for food stamps through the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) and a phased increase in the age limit on work requirements for adults benefitting from TANF.
• Changes to the National Environmental Policy Act to streamline and accelerate permitting for oil and gas projects.

Members of the House will return to Washington today, with a vote in the House Rules Committee to establish the parameters for amending and debating the bill. This sets up a likely vote on Wednesday. Under House rules, lawmakers require a minimum of 72 hours to read the bill, so Wednesday is the earliest a vote can be taken. Once the House votes, the bill will go to the Senate, which may take us to next weekend, although there is a chance the bill could be signed into law as early as Friday. Time remains very much of essence.

While both parties have expressed confidence that the bill will pass, there is a non-zero risk for a holdup in any of the stages outlined. We will monitor conditions closely and communicate any required updates.

During times of expected uncertainty and volatility, be sure that your investments are appropriately funded to match the level of risk you are comfortable with. This includes ensuring you have sufficient liquidity to cover your short-term needs to avoid selling risk assets under unfavorable circumstances and sacrifice returns over the long term. If you prefer to shift your holdings to be lower risk, talk with your advisor about the available options.