Report | Budget Taxes and Public Investment

Debt ceiling deal threatens jobs, economic growth

Issue Brief #311

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Press release: Debt ceiling deal threat to short-term job creation and long-run economic growth

The debt ceiling deal that President Obama signed into law on Tuesday will lead to massive job loss in the short term and threatens economic growth in the long run, a new Economic Policy Institute/The Century Foundation analysis finds.  The spending cuts in the agreement to raise the debt ceiling, along with the failure to extend the payroll tax holiday and emergency unemployment insurance, will cost the economy 1.8 million jobs through 2012.  The deal disproportionately cuts the non-security discretionary (NSD) part of the federal budget to the lowest level in more than 50 years, potentially halving investments in education, transportation infrastructure, housing, health and infant nutrition over the next decade.

Debt ceiling deal threatens deep job losses and public investment finds that the spending cuts in the deal will reduce GDP by $43 billion in 2012, lowering employment by roughly 323,000 jobs.  The failure to extend the payroll tax cut will reduce GDP by $128 billion, resulting in roughly 972,000 fewer jobs, and the failure to continue emergency unemployment benefits will reduce GDP by $70 billion, resulting in roughly 528,000 fewer jobs.  In other words, the debt ceiling deal will result in more jobs lost in 2012, relative to current budget policy, than have been created since employment troughed in early 2010.

Over half of the deal’s spending cuts will come from the NSD portion of the budget, which represents only 15% of the total federal budget.  The deal’s initial spending cuts reduce NSD from 3.5% to 2% of GDP in 2021, the lowest level in over 50 years.  If the committee tasked with producing additional cuts cannot agree to a plan, or if Congress does not pass it, the sequestration mechanism would reduce NSD further, to 1.7% of GDP.  At the 1.7% level, NSD spending would be roughly half of what it is right now.