Government Shutdown Averted

Investing.com — The U.S. narrowly avoided a government shutdown after Congress passed a spending extension until March 14, 2025. This extension includes $100 billion allocated for disaster relief and $30 billion for agricultural aid. However, Goldman Sachs warns of larger fiscal issues ahead.

Debt Limit Concerns

One major issue not addressed in the recent bill is raising the debt limit. Goldman notes that Republican leaders have committed to raising the debt limit by $1.5 trillion next year in a ‘reconciliation’ bill, which can pass without bipartisan support. This will likely be accompanied by $2.5 trillion in spending cuts over the next decade, equating to 0.7% of GDP.

The estimated $1.5 trillion debt limit increase may postpone the deadline from July-August 2025 to early 2026, but the timing hinges on Treasury cash flows.

Challenges in Achieving Cuts

Goldman acknowledges challenges in achieving the $2.5 trillion cuts. Previous attempts faced significant resistance. Potential savings may target health programs like Medicaid reforms and Medicare payment adjustments, yielding up to $1.7 trillion in savings. Expiring subsidies under the Affordable Care Act could save another $300 billion over ten years, while repealing the Inflation Reduction Act might save around $500 billion over the same period.

However, Goldman warns of potential lack of support from Republican lawmakers for these measures. For example, support for certain IRA provisions may limit savings to $100 billion over ten years, primarily through reduced electric vehicle incentives.

Tariff revenues could theoretically contribute, but Goldman stresses the challenge of obtaining near-unanimous support.

Future Fiscal Policy Options

Goldman predicts two potential paths for fiscal policy in 2025:

1. Two-step reconciliation process: A smaller bill focused on immigration and debt limits, followed by a larger package addressing tax cuts and broader spending adjustments.
2. Single comprehensive bill: Though Goldman indicates that the two-step process appears more likely, as the incoming administration may aim for quick wins on immigration.

Republican leaders might begin planning the two-step fiscal strategy in January by initiating a budget resolution to enable reconciliation legislation. However, this approach will delay clarity on the broader fiscal package's scale and details for several months, according to Goldman.