Government shutdown averted but bigger fiscal challenges ahead, says Goldman
2024.12.23 04:30
Investing.com — The U.S. narrowly avoided a government shutdown after Congress passed a spending extension until March 14, 2025, with $100 billion allocated for disaster relief and $30 billion for agricultural aid. But while this measure prevents an immediate crisis, Goldman Sachs warns that larger fiscal issues loom on the horizon.
One of the major points of contention – raising the debt limit – was left out of the recent bill. However, Goldman notes that “Republican leaders committed to raise the debt limit by $1.5 trillion next year in a ‘reconciliation’ bill,” which can pass without bipartisan support. This would be paired with $2.5 trillion in spending cuts over the next decade, equivalent to 0.7% of GDP.
The Wall Street firm estimates that the proposed $1.5 trillion debt limit increase could push the deadline from July-August 2025 to early 2026. However, the exact timing depends on Treasury cashflows.
Despite this, the firm acknowledges that achieving the $2.5 trillion in cuts will not be straightforward. “This is a more explicit commitment that will be difficult to achieve,” the note states, emphasizing that previous attempts to secure such savings have faced resistance.
Potential savings could target health programs, including Medicaid reforms and Medicare payment adjustments, which might yield up to $1.7 trillion. Expiring subsidies under the Affordable Care Act could cut another $300 billion over ten years, while repeal of the Inflation Reduction Act (IRA) could in theory save approximately $500 billion over the same period.
Nonetheless, Goldman warns that Republican lawmakers may not uniformly support such measures, limiting their potential impact.
“For example, we expect that support among some Republican lawmakers for certain IRA provisions will limit the savings to around $100bn/10yrs (mainly via reduced electric vehicle incentives),” the firm continued.
Tariff revenues could theoretically contribute, but Goldman stresses the difficulty in achieving the near-unanimous support required.
“The experience over the last few days highlights how hard it will be to get the near-unanimous support needed to pass a fiscal package along party lines, and there are likely to be many Republican lawmakers who oppose legislating tariff increases.” the note adds.
Looking ahead, Goldman sees two potential paths for fiscal policy in 2025. One option is a two-step reconciliation process – passing a smaller bill focused on immigration and debt limits, followed by a larger package addressing tax cuts and broader spending adjustments.
The other path involves a single comprehensive bill. However, Goldman suggests that the “two-step process looks more likely than one comprehensive package,” as the incoming administration may prioritize quick wins on immigration.
In that case, Republican leaders are likely to start preparing for the two-step fiscal strategy in January by initiating a budget resolution to enable reconciliation legislation. This process, however, will delay clarity on the full scale and details of the broader fiscal package by several months, according to Goldman.
