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Economic News & Analysis—October 17, 2013

Debt ceiling deal

By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Senate leaders crafted a deal to suspend the debt ceiling until February 7 and to fund the federal government until January 15. The agreement passed the House and the Senate.

In addition to ending the partial shutdown and suspending the debt ceiling, the agreement will create a bipartisan committee (a Super Duper Committee, to distinguish it from the Super Committee that failed miserably after the August 2011 debt ceiling fight) with a target of December 13 for preparing a deficit reduction plan.

Furloughed federal employees will be given back pay, and an income-verification requirement will be added for those receiving subsidies under the Affordable Care Act.

The back pay for federal employees will help dampen the economic impact of the government shutdown on the communities in which they live. In terms of the shutdown’s economic impact on gross domestic product, I believe it will likely be a rounding error.

The deal sets the stage for future fights. Another round of federal spending cuts under the sequester is scheduled to occur with the new calendar year. Democrats are likely hoping that the Super Duper Committee will come to an agreement to reverse these cuts—or to at least give some flexibility to the agencies affected by them. That may be the best we can hope for out of this committee. There is little reason to expect that it will come up with a long-term plan to reduce entitlements and transform the tax system. A lot of what happens in Congress between now and the midterm elections in November 2014 will likely be posturing for votes.

Suspending the debt ceiling until February 7 will give the Treasury the opportunity to reload its ability to use extraordinary measures to postpone the next time the debt ceiling needs to be raised, which will likely be in June or July—smack dab in the middle of campaign season. This will give lawmakers the perfect opportunity to stage more grandstanding and theatrics. 

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