The Price of a Deal

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The Price of a Deal

January 09, 2025

Policymakers are staking their positions on a US debt ceiling compromise, meaning raising, suspending, or repealing the debt limit may come at the cost of federal spending cuts. This report explores what comes next now that mandatory and discretionary federal government spending, along with their defense and nondefense components, are probably all on the table.

Key Insights

The red sweep (i.e., GOP control over both houses of Congress and the White House) does not guarantee smooth sailing for key pieces of legislation in 2025, including for the debt limit.

Like any other political party, the Republican party is heterogeneous, and there will not be unanimity on every issue. Indeed, the cost of doing fiscal business may be spending cuts. Mandatory and discretionary outlays for defense and nondefense items are on the table.

While revenue raisers, including select tax hikes, widening the tax base, and closing loopholes, should also be a part of debt reduction strategy, they are currently not a part of the debate.

Cutting waste and generating efficiencies can lower costs and increase productivity. However, significant federal spending reductions to programs that are critical for economic functioning, financial market stability, and social well-being might be highly disruptive and materially weigh on the US economy over the short run.

Still, Democrats and some Republicans are likely to ask for material concessions to cutting federal programs and some tax reform in exchange for a deal on the debt limit.

2025 US Debt Ceiling Showdown