Home Finance US debt cap zeroes in on low-spirited spending up front

US debt cap zeroes in on low-spirited spending up front

The key focus of the debt-ceiling negotiations between President Joe Biden and House Republican Kevin McCarthy centres around “discretionary spending,” which refers to the portion of the annual federal budget, approximately $6 trillion, that Congress sets each year.

While talks are ongoing, both parties aim to reach an agreement to raise the $31.4 trillion debt ceiling and avoid a potential default by June 1.

However, it has been established that cuts to Social Security and Medicare, which constitute a significant portion of the budget, will not be considered.

Instead, the proposed cuts are expected to target programs such as education, rail safety, and law enforcement, which could have adverse effects on U.S. economic growth, as cautioned by economists.

Discretionary spending encompasses a wide range of military and domestic programs, with military spending typically accounting for about half of the total, varying from year to year.

The remaining portion is allocated to domestic programs like law enforcement, transportation, housing, and scientific research.

Discretionary spending as a percentage of the U.S. gross domestic product reached its peak in the late 1970s, and reductions in this category have played a significant role in several major budget agreements since the 1980s.

The Biden administration and Democrats have proposed maintaining flat discretionary spending from the current fiscal year of 2023, which represents a decrease from Biden’s 2024 budget, and then imposing spending caps in future years.

On the other hand, House Republicans passed a plan that suggests saving $3.2 trillion by implementing an annual growth cap of 1% for ten years.

Republicans insist that any agreement should result in reduced government spending compared to the previous fiscal year, advocating for cuts to 2022 levels.

There is also a divergence of opinion regarding the duration of spending caps, with Republicans suggesting six years and the White House proposing only two.

Notably, negotiators have avoided addressing the primary driver of U.S. debt, which is the escalating costs of retirement and healthcare due to an aging population.

The Congressional Budget Office estimates a projected 67% increase in the Social Security pension program and nearly doubling costs for the Medicare health program by 2032, collectively accounting for approximately 37% of current federal spending.

While spending on healthcare, retirement, and benefit programs has steadily risen over the years, negotiators in the debt-ceiling talks are exploring cuts in other areas of domestic and military spending.

Establishing a general agreement on spending levels and caps could help the United States avoid default, but it would likely lead to further budget battles as lawmakers would still need to reach consensus on funding for various areas such as fighter-plane construction and border enforcement.

Republicans have expressed their intent to avoid cuts in national defense and veterans’ care, which would require more substantial reductions in other programs.

The Republican-led House Appropriations Committee has introduced legislation to increase spending on veterans’ care, border security, and other priorities in the coming year.

However, to maintain overall spending at the same level as this year, it would necessitate cuts exceeding 13% in other areas like scientific research and environmental protection, according to the Centre on Budget and Policy Priorities.

The Democratic-controlled Senate is unlikely to accept such figures, potentially leading to a government shutdown if an agreement is not reached by the end of the fiscal year on September 30.

It is worth noting that while Republicans at the federal level generally advocate for spending cuts in discretionary items, Democratic-leaning states tend to benefit more from federal domestic spending, as analysed by a left-leaning think tank.

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