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The Debt Deal – A Short-Term Fix Is Better Than Nothing!

A bipartisan deal emerges from the Senate. After weeks of contention, a bill to reopen the bulk of the federal government and avert an unprecedented U.S. default appears headed toward President Obama’s desk. Senate Democrats and Republicans reached an accord on October 16, and as House Speaker John Boehner has promised an expedient vote on any bill crafted in the Senate, the measure seems poised for quick passage. “From our side [in the Senate], I don’t see any evidence of delay,” Sen. Rand Paul (R-KY) told the New York Times Wednesday morning.

In a sense, Congress merely kicked the can down the road. The measure would fund the federal government through January 15 and extend America’s borrowing authority through February 7. A bipartisan negotiating committee would face a December 13 deadline to create a federal spending and tax blueprint for the next ten years.

The Senate bill includes only one alteration to health care reforms. The Affordable Care Act will emerge from this battle relatively unscathed. People who receive federal subsidies for their health insurance under the ACA will face a stricter income verification procedure, but the subsidies will remain in place. House Republicans had demanded a 2-year delay for the 2.3% tax on medical devices stemming from the ACA, but that effort was set aside Tuesday. Congressional Democrats had argued for a 1-year delay in the $63 per-person “reinsurance” fee slated to hit group health plans in 2014; they didn’t get it.

The bill also arranges retroactive pay for furloughed federal workers. All federal employees sent home as a result of the shutdown are slated to receive delayed salary payments.

The budget cuts passed into law in 2011 will remain in place. The $1.2 trillion in automatic federal spending cuts scheduled through 2021 will still be carried out, as mandated by the Budget Control Act of 2011 that brought an end to that summer’s debt ceiling fight. The 2013 sequester cuts represented the first step in this reduction of federal spending.

Wall Street felt relief. By the middle of the trading day Wednesday, the S&P 500 was approaching its all-time peak. The DJIA, NASDAQ and S&P were all up more than 1% and three stocks were gaining on the NYSE for every one falling. Fitch Ratings had threatened to downgrade America’s credit rating late Tuesday; presumably, it will now refrain from doing so due to the deal reached on Capitol Hill.

A short-term fix is better than none at all. You could argue that this deal simply postpones a solution in favor of a short-term truce on Capitol Hill. Even so, it beats the potentially catastrophic alternative of a U.S. default. Wall Street will now wait to see if Congress can provide a gift for the holidays – a larger-scale solution to trim future deficits.

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About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

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