The outlook for the U.S. economy in 2024 brightened slightly over the weekend after Republican and Democratic leaders in Congress agreed on how much money the federal government can spend this year, potentially averting a government shutdown looming in less than two weeks. 

Economists at Moody’s Analytics are upwardly revising their projection for the growth of the U.S. economy in 2024 after congressional leaders announced they have agreed that the U.S. can spend $1.66 trillion on discretionary appropriations—the money it spends on defense and on domestic programs other than mandatory expenses like Social Security, Medicare, and interest on the national debt.

That’s roughly the same as last year, meaning that government programs will likely continue to function without any big budget cuts.

The deal lessens, but doesn't entirely eliminate, the chance of a disruptive and economically costly shutdown of the federal government should lawmakers fail to pass a budget. Some Republican lawmakers in Congress have threatened to block budgets from going through if they don't significantly cut spending.

“Leading into this, there were a lot of risks—shutdown versus big spending cuts,” said Brendan LaCerda, a senior economist at Moody’s Analytics. “Seeing this deal come together, this would have been on the optimistic side of what we would have originally anticipated ... in terms of tuning our forecasts, we'll probably be adding a little bit more strength to the economy in 2024 because we’re not going to go through with those big cuts.”

Moody's Analytics says it will probably add 0.1 percentage point to its previous 2024 gross domestic product (GDP) growth forecast. The GDP grew at a 2.1% annual rate in the fourth quarter of 2023, according to Moody's outlook.

According to an analysis by Pantheon Macroeconomics, the budget deal is roughly in line with the spending limits that President Joe Biden and then-House Speaker Kevin McCarthy agreed to in May, and will result in total government spending, including mandatory outlays, growing by 2.5%.

That means government spending will provide a "small tailwind for the economy," Ian Shepherdson, chief economist at Pantheon, wrote in a commentary.

Deal Could Still Fall Apart, Debt Still Rising

Lawmakers must still agree on the details of how the ,spending will be allocated and pass funding bills. If they don’t, the government would partly shut down beginning Jan. 19, and fully shut down shortly afterward by Feb. 2, leading to millions of federal workers and contractors being laid off and certain services shutting down.

The economic damage would vary depending on the length of a shutdown, with a short one causing minimal harm, but with serious consequences if it were to drag on for weeks, LaCerda of Moody's Analytics said.

By leaving spending and taxation more or less unchanged, the proposed deal would leave the $34 trillion national debt on its current upward trajectory. Democrats have proposed reducing budget deficits by raising taxes on the wealthy, while Republicans favor balancing the books by cutting spending on social programs. As with past bipartisan compromises, the proposed deal does neither.

“The U.S. federal government's finances are in poor shape, and there is really no sign of improvement,”  LaCerda said. “The typical Washington, D.C., compromise is to spend more money in the end.”

As reported by numerous media outlets, the deal would include pushing forward a $20 billion reduction to the $80 billion boost that the IRS budget was given for modernization and enforcement of tax laws by the Inflation Reduction Act (IRA). This is also likely to hurt the budget, LaCerda said, because more IRS funding generally means the agency is able to crack down on tax cheats and collect more of what the government is owed.

But with only a broad outline agreed upon, and with time rapidly running out, there is still a chance for the deal to fall apart, especially because it leaves aside the contentious issue of aid the White House has requested for Israel and Ukraine.

“They've agreed on the top-line numbers, but as always, the devil is in the details, particularly around the risk of there possibly being a government shutdown,” LaCerda said.  “There are still a lot of flashpoints out there.”

LaCerda said Moody's Analytics probably would put the odds of a shutdown at about 25% versus somewhat under 50% before the deal over the weekend.