What the deal to raise the debt ceiling means for the economy

LEILA FADEL, HOST:

The deal that President Biden and House Speaker Kevin McCarthy reached over the weekend will, if approved by Congress, raise the debt ceiling and avoid a government default, and it puts some boundaries on fights over the budget for the next two years. To find out what this means for the economy and for the federal debt, we turn to David Wessel. He's director of the Hutchins Center at the Brookings Institution. Good morning, David.

DAVID WESSEL: Good morning, Leila.

FADEL: So the legislation has lots of pieces. What are some of the highlights?

WESSEL: Well, President Biden and Speaker McCarthy are both doing a lot of spinning. They are both claiming victory, but they can't brag too much because each of them needs votes from the other side to get this through Congress. So here's some of the highlights. One, the defense budget will go up about as much as President Biden proposed in his budget, though not as much as some hawks wanted. Total annually appropriated domestic spending will not keep up with inflation for the next couple of years. There are caps on that, but which individual agencies and programs will be cut depends on the details of appropriation bills that have yet to be written.

There's also an agreement, though it's not spelled out in the 99 pages of legislative text, that $20 billion of the 80 billion that the IRS won last year to crack down on tax cheats will be diverted to other domestic spending. All the money that President Biden won last year for infrastructure, climate change, semiconductors survives intact. And we won't have to worry about the debt ceiling for another couple of years.

FADEL: Now, how much will this deal restrain federal debt over the next few years?

WESSEL: A little. It's important to remember that the only spending cuts in this deal involve annually appropriated spending for things other than defense. That slice of the budget is only about 10% of all federal spending. This deal doesn't touch the big drivers of the federal deficit - health care and Social Security - nor does it do anything to close tax loopholes or raise revenues. So the federal debt will climb a bit slower than projected if this agreement gets through Congress. We don't have any hard numbers yet. But the heavy lifting remains for the future, after the 2024 presidential election. Remember that most of the provisions of the 2017 tax cut expire in 2025, so we'll have a fight over taxes then. And the Social Security trust fund runs dry in about 10 years.

FADEL: Now, many economic forecasters are predicting that the U.S. is headed for a recession later this year or early next year. If this package passes, does it make a recession more or less likely?

WESSEL: Well, less federal spending does mean less money pumped into the economy, and that will slow economic growth for the next couple of years by perhaps one- or two-tenths of a percentage point, so it's definitely a negative. But the effect of this agreement will be overwhelmed by all the other things going on in the economy - the lingering impact of Fed rate increases, inflation, energy prices and so on. But importantly, this removes a major cloud over the economy and over financial markets. One less thing to worry about, so that's a big plus.

FADEL: Some Republicans and Democrats are threatening to vote against this legislation. What happens if it doesn't pass?

WESSEL: Well, then we'll be right back to where we were last week, facing a possible default. Treasury Secretary Yellen says without an increase in the debt limit by June 5, the government won't have enough money to pay its bills. Back in 1990, there was a deal on budget that got voted down by the House, and they came back and got a new one. But that took three weeks to work out, and we don't have three weeks this time.

FADEL: David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Thank you, David.

WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.