US Congressional Deal: Key Implications

After 16 days of government shutdown, US political leaders have reached a deal to end the fiscal and debt stalemate in Washington.

The deal will fund the government through to January 15, 2014, and raise the debt ceiling until early February. This removes the most immediate danger, namely that the US would breach the debt ceiling on October 17, but we acknowledge that the importance of this date may have been somewhat inflated, as it is possible that default would not have come for several days.

Economically, the effect of the shutdown may weigh on GDP slightly in the fourth quarter, especially if there is concern that the US could be subject to another government shutdown in January.

From a political point of view, this is a big win for President Obama and Congressional Democrats. Republicans demanded the defunding – and then the delaying – of Obamacare, the president's landmark healthcare reform law, as a pre-requisite to re-opening the government. They got neither, but they did get the lion's share of the blame and their lowest poll numbers on record. It is difficult to say exactly how this will affect the balance of power within the Republican Party, particularly the House GOP caucus, but we could see one of two significant outcomes that would affect the course of fiscal negotiations going forward:

  • The developments of the last two weeks could discredit some of the more radical members of the House Republican Caucus (and Senate, for that matter), resulting in a few months when negotiations and progress on the debt is possible.
  • Speaker John Boehner could be blamed for not being able to get more for Republicans and he could lose his speakership, potentially being replaced by a more ideologically conservative figure.

While there has been much attention to the balance of power in the House of Representatives, we believe it is far too early to say whether Republican control of the chamber is in serious jeopardy in the November 2014 mid-term election.