As the June 5 deadline edges closer, lawmakers approved a compromise that helps the U.S. government avoid defaulting on its debt—but doesn't provide long-term solutions.
"I'm glad that the outcome was not the worst possible outcome—a default. Even if the government was prioritizing payments and still not technically defaulting on the debt, I'm glad we didn't have to cross that bridge," said Steve Wyett, BOK Financial® chief investment strategist.
"But the reality of it is that this agreement does little to narrow the gap between spending and revenues, meaning that the annual budget deficit is still significant," he continued. "If we use the Congressional Budget Office's baseline for economic growth, $4 trillion will be added to the national debt between now and Jan. 1, 2025, which is only two-and-a-half years away."
One issue is that the deal doesn't actually reduce government spending; instead, government spending will still increase but just not as much as what was originally projected, Wyett noted.
Another issue is that the deal only extends the debt ceiling by a date, rather than a dollar amount. While that is not unusual, it means that the amount added to the national debt could be higher or lower than the $4 trillion estimate, depending on economic growth. Given that economic growth is projected to slow and interest rates are expected to stay high, the risk is that the national debt will actually be higher than $4 trillion, Wyett cautioned.
Furthermore, looking down the road, the current rate of government spending and debt accumulation may have serious consequences. "We're not talking about failure," Wyett said. "We're talking about degrees of success," he said. "We've been putting ourselves in a position where the level of success that we can expect in the future is less than what it could be."
For more on the debt ceiling, read "The dilemma of the U.S. debt ceiling" and "Debt ceiling drama."
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