THE plan proposed by Republican House Speaker Kevin McCarthy to raise the US debt ceiling in exchange for cuts in government spending would slow growth and cut employment, Moody’s Analytics said in a note yesterday.

According to the ratings agency’s research arm, if the draft presented by McCarthy on April 17 were passed as is, it would lead to a drop of 0.6 percentage points in US potential growth for next year, as well as the elimination of 780,000 jobs. 

Unemployment would reach 4.6%, against 3.5% last month, as compared to a scenario in which a new ceiling was approved without conditions.

President Joe Biden has called for such a “clean” lifting of the US borrowing limit, arguing that the deficit spending has already been approved by Congress and therefore not up for debate.

While the White House has warned that the Republican plan is akin to “economic hostage-taking” and McCarthy blames Biden for “bumbling” toward a default, a deadline is rapidly approaching; the US government risks defaulting on payment obligations by July or even earlier, with profound implications for the US and global economies.

McCarthy said Sunday the house will vote on his plan this week.

Stressing that the risk of recession is still present in the United States, Moody’s Analytics estimated that the plan as presented is “especially inopportune as it would meaningfully increase the likelihood of such a downturn.”

The note added that “the significant government spending cuts… are substantial headwinds to near-term economic growth.” – AFP, April 25, 2023.