Economist Warns Republican Debt Cap Plan Could Impact US Jobs and Economic Growth

Moody’s Analytics’ chief economist, Mark Zandi, testified before the Senate Budget Committee on Thursday, expressing concerns that a Republican proposal to cut federal spending in exchange for raising the US government’s debt ceiling could have negative consequences on employment, economic growth, and potentially lead to a recession.

Zandi presented data indicating that if the Republican plan were enacted, US GDP growth in 2024 would be 1.61 percent, compared to 2.23 percent under an alternative scenario, resulting in approximately 790,000 fewer jobs. The Republican demand for spending cuts as a condition for raising the debt ceiling is currently a point of contention between Republicans and Democrats. While Republicans emphasize the need to address the growing US debt, Democrats argue for raising the debt ceiling without conditions.

The ongoing standoff has raised concerns among investors, with the government recently paying the highest interest ever for a one-month debt issue. Zandi stressed the potential economic toll of passing the Republican-backed bill, warning that it could significantly impact economic growth. However, he also highlighted the catastrophic consequences of failing to address the debt ceiling issue.

Zandi suggested that the government might run out of funds to meet its obligations by June 8 if Congress does not take action, with a potential default occurring anytime between June 1 and August 8. US Treasury Secretary Janet Yellen had previously warned Republican House Speaker Kevin McCarthy about the risk of hitting the spending limit by June 1.

In urging a swift resolution to the situation, Zandi stated that failure to act promptly could lead to a recession, exacerbating fiscal challenges. Senate Democrats, planning multiple hearings, argue that the House-approved bill would adversely affect essential programs, including child care and education.

Republicans defend the need for spending cuts to address the growing US debt, projected to rise due to increasing pension and health costs driven by an ageing population. The House Republican plan, a key component of the proposal, aims to cut government spending by 8 percent next year and limit its growth by 1 percent annually thereafter.

The deadlock continues, President Joe Biden is scheduled to meet with House Speaker Kevin McCarthy and other top lawmakers at the White House. The uncertainty surrounding the debt ceiling issue has led investors to push Treasury securities yields to record highs. While Democrats accuse Republicans of hostage-taking, some conservatives argue that debt-ceiling deadlines have historically prompted budget deals in Congress. The debate intensifies as the parties explore different approaches to address the fiscal challenges facing the nation.

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