Debt deal liftsthreat of cutbacks

WASHINGTON — The budget agreement that congressional leaders and President Donald Trump forged late Monday lifted a potential drag on the U.S. economy for this year and next.

Under the agreement, the economy was spared from a series of deep spending cuts that were set to take effect under a budget law enacted in 2011. Monday’s agreement nullified those cuts and increased spending by $320 billion over two years.

Still, that additional spending isn’t expected to deliver a big boost to the economy. That is because the $320 billion figure is somewhat misleading. It’s an increase compared with the cuts that would have been required under the 2011 law. But it’s only a small gain compared with the current level of spending.

“It’s not so much that it’s a big boost, but it’s a pain that was avoided,” said Michael Pugliese, an economist at Wells Fargo Securities.

Like most economists, Pugliese hasn’t revised his economic forecasts based on Monday’s deal. He still expects economic growth to slip to 2.6 percent this year, a solid pace, from 2.9 percent in 2018.

Still, the budget deal preserves the higher levels of federal spending that have helped support the economy under Trump as he prepares to seek re-election. The agreement also lifts the limit on the government’s borrowing authority for two years,

thereby avoiding a battle that twice bedeviled the Obama administration and weighed on consumer sentiment and the financial markets.

The increase in the government’s borrowing authority, also known as the debt ceiling, has been a partisan flashpoint that has ignited political fights. If the debt ceiling isn’t raised, the government no longer can borrow and is forced to default on some of its obligations. It’s a prospect that can panic financial markets by eroding confidence in the United States as a place to invest.

Federal Reserve Chairman

Jerome Powell had pointed to the debt ceiling as a potential risk for the U.S. economy in testimony before Congress earlier this month.

In 2011, a fight between the Republican-led Congress and President Barack Obama over raising the debt limit led Standard & Poor’s to downgrade its credit rating of the United States for the first time in U.S. history, from AAA to AA+. Consumer confidence fell, and stock markets plunged.

Another duel over raising the debt ceiling ensued in 2013. Congressional Republicans sought to use it as leverage to delay the implementation of Obama’s health care law.

“The budget fights have become less odious,” said Joe Song, senior U.S. economist at Bank of America Merrill Lynch. “We’re not threatening to breach the debt limit or have a government shutdown over it.”