The agreement on the US budget that Democratic and Republican negotiators struck on Tuesday is a victory for common sense. For the past few years, populists on both sides of the political spectrum have hijacked economic policy making. The result has been a succession of damaging stand-offs. This week’s deal – which raises federal spending by $63bn over two years – is modest in size but encouraging. It shows that Washington has not lost the ability to compromise and take decisions.

Provided that Congress ratifies the agreement, the breakthrough has the potential to be highly beneficial to the US economy. While growth is picking up, the recovery remains fragile. The deal will ease the pain of the “sequestration”, reducing the fiscal drag. It will also remove a layer of uncertainty clouding the fiscal outlook. This will make businesses more relaxed about investing, helping the upswing gather momentum.

Both sides deserve praise for the accord. The Republican party pulled back from the extremist line it took during negotiations over the debt ceiling and accepted that federal spending could not be completely frozen. This concession is politically wise. The Grand Old Party slumped in the polls after it decided to flirt with a US default. Tacking back to the centre will help the Republicans recover some of the lost votes before next year’s midterm elections. For their part, the Democrats were wise to give ground rather than insist on an unconditional Republican surrender. In the event of another federal shutdown, they would have found it impossible to avoid part of the blame.