What Does the Debt Ceiling Deal Mean for Huntsville?

As we expected, Congressional Republicans and President Biden reached an agreement over the weekend to raise the debt ceiling (otherwise known as the U.S. Government’s credit card limit) in exchange for more moderate spending over the next 2 years. As usual with the government, the deal does not cut spending. The proposal will hold spending flat for one year on the “discretionary” 28% of the federal budget, which includes defense. Discretionary spending will then rise by 1% in 2025. After 2025, all bets are off. The remaining 72% of the budget, which covers things like Medicare and Social Security, will continue to rise as previously planned. So what does that all mean for us?

Military Spending in Huntsville:

The current proposal keeps military spending roughly flat. That may not seem all that bad, but inflation is growing 5%, thus spending needs to grow at 5% to stay even with current levels. A flat budget means that the military will be able to buy 5% less “stuff” next year than they could in 2023. That’s likely not catastrophic news, but not great news for the aerospace and defense community. It is worth keeping in mind that a large percentage of “wartime” spending (think Ukraine) is not officially allocated in the budget and not subject to the agreement.

Veterans Benefits:

The proposed legislation includes major carve outs from spending limits for veterans benefits and a new program for toxic exposure funding. VA benefits seem to be safe in the current iteration of the legislation.

Social Security and Medicare:

Despite what you may see in the news, benefit programs including social security and Medicare are part of that other 72% of non-discretionary government spending. The proposal makes no changes to funding for either program.

Economic Growth and Jobs:

Normally, increases in government spending grow the economy and reductions shrink it. However, this bill should help reduce inflation and shouldn’t limit economic growth materially. Given the overspending that led to inflation over the last few years, flattening the government spending curve should be helpful in fighting inflation. Additionally, the work requirements around government assistance in the bill will continue to expand the labor force, which should help reduce core inflation. Lastly, speeding up the process for building oil and gas pipelines will reduce energy costs, which frees up capital and should lead to economic growth.

Both Democrats and Republicans still need to secure the votes to pass this legislation in the coming days. It is very possible that changes are made to get the final deal over the finish line. Neither political party seems happy with the deal, a sign perhaps that it is a consensus deal down the middle. The true “x” date is somewhere between Jun 5th and June 9th, and we expect a bill to be passed to avoid the truly bad outcomes that come with a default.