Budget Deal: Short-Term Clarity, Long-Term Deficits

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Amid the recent market volatility, investors received a bit of good news from a surprising source: Washington.

In the wee hours of Feb. 9, Congress agreed to a two-year budget blueprint that should end the cycle of month-to-month uncertainty about whether the government might shut down (although there is still one more hurdle to clear, which we'll discuss below).

The agreement also suspended the debt ceiling until March 1, 2019, temporarily shelving the possibility that the United States might default on its debts.

The deal should forestall—at least for the next year or more—two dramas that had the potential to cause distress in the markets. That said, there's still plenty of cloud to go with this silver lining: The agreement does nothing to resolve the country's growing deficits or the national debt. In fact, it adds to the problem.   

Two-year budget deal

The budget agreement increases the spending caps for the rest of the federal government’s current fiscal year as well as for fiscal 2019, which begins on Oct. 1. As a result, spending on both defense and domestic programs will rise over those two years.

The deal also includes about $90 billion in federal disaster aid for victims of last fall’s hurricanes in Texas, Florida and Puerto Rico, and the California fires.

But there’s one last hurdle: As part of the agreement, Congress funded federal government operations through March 23. Between now and then, lawmakers will need to pass the appropriations bills that allocate federal dollars on an agency-by-agency and program-by-program basis.

Technically, if Congress doesn’t finish the appropriations process by March 23, there could be another government shutdown. However, lawmakers are confident they can get the details finished now that the hard part—agreeing to the overall spending numbers—has been finalized.

Completing the appropriations process would end the need for Congress to continue passing short-term measures to keep the government open and operating, which it has been doing since the start of the fiscal year last Oct. 1. Congress has passed five such measures, known as “continuing resolutions,” since then to keep the government open. One of those agreements came after a brief, three-day government shutdown in January that voters in both parties thought unnecessary.

Debt ceiling deal

From the market’s perspective, the agreement to suspend the debt ceiling until March 1, 2019, is a much bigger deal. The debt ceiling is a statutory cap on the amount of debt the country can accumulate. The United States hit the current limit of about $20 trillion in December. Since then, the Treasury Department had been employing what it calls “extraordinary measures,” a series of temporary steps it can take to ensure the country doesn’t default on its debt.

But those steps are finite and Treasury Secretary Steven Mnuchin warned Congress earlier this month that unless Congress increased the nation’s borrowing limit, the Treasury would have only enough cash available to pay its bills until the end of February.

In recent years, uncertainty about whether the country would default has produced significant market volatility. Stocks fell sharply in the summer of 2011, when the country came within days of a default. That dip helped push divided members of Congress into striking a deal at the last minute.

Under the latest deal, the debt ceiling will return on March 1, 2019, at which point the Treasury Department will again need to resort to extraordinary measures to stave off a default for another several months. That means Congress isn’t likely to face another deadline to deal with the debt ceiling until the fall of 2019.

Debate over the debt ceiling is contentious. While the recent agreement relieves some of the immediate pressure, it does nothing to address the underlying issue: the country’s unchecked accumulation of debt. As the chart below shows, Congress has been forced to raise the debt limit steadily over the last 25 years, from under $5 trillion in 1993 to over $20 trillion this year.

The debt ceiling has been rising steadily

Congress has raised the debt ceiling by more than 300% since 1993.

The increased federal spending permitted by the latest agreement means that both the deficit (the annual difference between federal spending and federal revenue) and the debt (the accumulation of past deficits) are projected to continue growing. As a result, the U.S.’s debt-to-GDP ratio will remain among the highest in the world. Unchecked, extreme indebtedness can slow economic growth.

What should investors make of this? While the budget deal may have removed some of the near-term anxiety over government shutdowns and a possible default, rising deficits and the country’s massive debt remain something to watch over the longer term. Ultimately, Congress will have to address these issues. But when and how are anybody’s guess.

Next Steps

    • If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
    • Watch Schwab experts discuss other market and economic topics in the Schwab Market Snapshot.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk including loss of principal.International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.