Investment Strategy Brief:
Passing the Fiscal Responsibility Act of 2023

Below is a transcript of this week’s video.

Hi, This is Jason Pride, Chief of Investment Strategy and Research at Glenmede. I hope everyone had a good Memorial Day with their friends and family and took a moment to remember and recognize those that have served our country.

In a seemingly symbolic gesture, while many of us were enjoying the long weekend, White House and Congressional negotiators pounded out a debt ceiling agreement.

The Fiscal Responsibility Act of 2023, as the bill is titled, includes a suspension of the debt ceiling until January 1, 2025, paired with approximately $1 trillion in estimated budget cuts for the next decade. Most of the budget cuts come from limits on non-defense discretionary spending – the limits of 0% and 1% growth in 2024 and 2025, which have an enforcement mechanism included, provide $246 billion in savings, while the cuts over the following 4 years provide over $800 billion in savings, but do not have enforcement clauses. In addition, the deal includes entitlement work requirements, ending the suspension of student loan payments, rescinding the remaining unused COVID-relief funds, and a reduction in funding to the IRS for extra tax law enforcement.

The introduction of the bill sets up a series of procedures and votes to occur just before the extended June 5th X-date announced by U.S. Treasury Secretary Yellen on Friday.

The text of the bill has already been drafted and was posted for review publicly on Sunday, May 28. That step started the 72 hour waiting period required by the House to provide enough time for legislators to review and respond to the legislation before a vote. A House vote is expected to occur by Wednesday or Thursday, after which it proceeds to the Senate for vote, which should in turn take around 2 days. If timed well, such logistics could deliver the bill to the President’s desk for signature just before the June 5^th deadline.

The timeline for passage will be tight, but passage is plausible.

However, it’s important to recognize that the X-date is not an absolute D-date after which the U.S. must default on its debt obligations. Even if political leaders are unable to get the deal done in time, the likelihood of a government default remains quite low. The Treasury should still have enough incoming cash flows to cover net interest costs, Social Security, Medicare, defense and veterans and health benefits. As such, the Treasury is likely to be able to keep making debt payment by prioritizing such spending and shifting around the timing of other items.

The Fiscal Responsibility Act of 2023 may be just the first among several acts of austerity to combat a projected rise in government debt service costs over the next decade. Higher interest rates are expected to put additional pressure on the government budget, likely leading to future discussions about budget cuts, a similar issue to what the U.S. government faced in the mid-’80s and early-’90s, during which several major acts of Congress were passed to rein in deficit spending.

The last time the debt ceiling was such a contentious issue, we saw a similar process playing out. Almost paradoxically, the S&P 500 started a noticeable decline after the debt ceiling was raised, not before. We suspect that this occurred in part due to the austerity reflected in the reduced budget spending on top of concerns following the downgrade of U.S. debt by a major credit agency. While the resolution of the debt ceiling before the deadline may help hold off any downgrades, and the budget reductions are in aggregate a little less than those in 2011, each tightening of the government’s purse strings should act as a headwind to the economy and profits.

So in summary:

• The White House and Congressional leaders struck a debt ceiling deal with notable spending cuts over the holiday weekend
• The U.S. Treasury’s cash balance is becoming dangerously low, increasing the urgency of ushering the bill through Congress
• Even if legislative procedures run past the X-date, the Treasury should have more than enough cash flow to cover key outlays, including interest on debt
• The debt ceiling spending cuts may be the first among several steps of austerity (i.e., budgetary belt tightening) to offset rising interest costs
• With a debt ceiling bill drafted, the risk of default is low, but the resulting austerity may still be a headwind to economic and profit growth

Thanks for listening! And please don’t hesitate to reach out with any questions.

This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.