We have the following thoughts on the Fiscal Responsibility Act (FRA) that President Biden signed into law over the weekend.
  1. The debt ceiling is suspended until January 2025, which removes a major source of market uncertainty until after the 2024 election.
  2. The FRA caps discretionary spending for the next six years, which could reduce spending by $2.1 trillion over the next decade. However, only the first two years of caps are enforced by a sequester with the remaining years nonbinding. The caps in the out years would need to be in place to achieve the $1.2 trillion in savings.
  3. The debt-ceiling deal established spending caps for the next two years on both defense and nondefense discretionary spending. For 2024, defense spending under the deal will grow at 3% to $886 billion (bn) from its 2023 level of $858bn, while non-defense spending will decrease by approximately 5% to $703bn from $744bn in 2023.
  4. The deal also includes several side agreements not included in the actual legislative text that allows appropriators to mitigate the effect of these spending limits, including 1) use of $20bn of pre-approved IRS funding to make-up the gap in non-defense spending, and 2) the ability to use “emergency supplementals,” which are not subject to the spending caps, to provide more money to defense priorities, including Ukraine.
  5. The caps present a minor economic headwind. The Congressional Budget Office estimates suggest that these various cuts will reduce government outlays by about 0.2% of economic output in fiscal year (FY) 2024 (which begins in the fourth quarter of 2023) and 0.4% in FY 2025.
  6. The act forces the resumption of federal student loan payments, which is likely the bigger fiscal headwind included in the deal—with borrowers, who have outstanding federal student loan debt, once again having to pay principal and interest on their student loans, something they have not had to do for nearly 3.5 years. Estimates vary, but this could amount to about $70bn-$100bn of annualized loan payments for borrowers and a headwind to consumer spending broadly. The act does not affect the status of the president's plan to forgive up to $20,000 in student loans for some borrowers, which is being challenged before the Supreme Court.
  7. A number of additional provisions do not speak directly to fiscal policy, including new work requirements for certain food assistance recipients, a streamlined permitting process for energy-related projects, and green-lighting a proposed natural gas pipeline from West Virginia to North Carolina.
  8. We once again reiterate that investors remain in a portfolio consistent with their well-reasoned asset allocation.
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