U.S. Congress Prepares to Pass the One Big Beautiful Bill (OBBB) Act

Congress Prepares to Send Signature Bill to President's Desk for July 4^th Signing

• Despite House Minority Leader, Hakeem Jeffries, marathon speaking session, all indications are that Congressional Republicans have the votes to pass President Trump's signature legislative package to extend the 2017 Tax Cuts & Jobs Act, implement a handful of new consumer and business tax cuts, and increase defense and border security spending. The bill will also include cuts to spending on Medicaid and SNAP, in addition to repealing most of the clean energy tax credits from the Inflation Reduction Act of 2022.
• The bill is projected to cost $4 trillion over ten years, including higher interest payments due to increased deficits. Federal deficits are expected to stay around 7% of GDP through the next decade, about 1 percentage-point above previous estimates. Federal debt as a percentage of GDP is now anticipated to grow from 100% in 2025 to 125% by 2034, relative to 117% before the OBBB was passed.
• The expected increase in federal debt issuance has resulted in some upward pressure on U.S. Treasury yields in recent months, driven by a rising term premium. U.S. Treasury yield movements this week have been constrained overall, but with a holiday shortened week, weaker pricing may yet emerge in the days ahead.
• The economic impact of the bill is expected to be modest, as the largest provision simply extended existing tax policies that no longer carry an economic multiplier. Overall, the bill is expected to raise real GDP by roughly half a percentage point over the next ten years, according to the Congressional Budget Office (CBO). However, this is likely to be front-loaded in the first few years owing to new spending on defense and border security.
• The bill will also raise the debt ceiling by $5 trillion, offering over two years of fiscal capacity for the U.S. Treasury and eliminating the immediate risk of default. The government hit the debt ceiling back in January, requiring the Treasury Department to implement extraordinary measures to maintain operations, which were projected to run out by early September.

Key Implications

• Net new initiatives from the OBBB remain consistent with our June forecast update, where we already incorporated a lift to GDP growth of 0.2 percentage points for each of the next two years from the near-term spending initiatives.
• On the flip side, this “growth enhancer” comes at a sharp fiscal cost. A deficit running at 7% of GDP would historically only occur during recessions.
• Ordinarily this should ring alarm bells in financial markets, but investors are likely considering the partial offset to the deficit impact that could be provided by tariff revenues.
• In particular, the Congressional Budget Office estimated last month that tariffs currently in effect would raise just under $3 trillion in new revenues over the coming decade, net of the negative economic impacts. Year-to-date, tariff revenues have accumulated $97 billion, including June revenues estimated to be roughly $28 billion.
• Even if this revenue stream were to be sustained as a spending offset, that would leave deficits running at around 6-6.5% of GDP – still an unsustainable trend. Any hiccup in economic growth over the next decade would place U.S. finances at further risk. 
• The fiscal responsibility can has been kicked down the road for now. However, the steady rise in interest costs means the necessary deficit adjustment will eventually carry a higher economic cost in spending cuts and/or additional revenues from new or existing sources.
• Higher economic growth could aid in restraining debt growth, but this should not be solely relied upon as the way forward. Balancing the budget from economic growth alone would require sustained nominal GDP growth of 6-7%, which is well above the average of 4% over the past decade.

Disclaimer

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