Capitol Hill: Two Year Budget Deal

Published on October 26, 2015

Word is spreading quickly across the Hill this afternoon that the five way negotiations between the Congressional leadership and the White House may come together in an announcement as soon as later today for a two year budget agreement that would lift both defense and non-defense domestic discretionary spending and increase the federal debt ceiling until March 2017.

*** The agreement is a Senate-led bill that would be attached as an amendment to an existing House-passed bill. If it can be nailed down and filed as early as tonight, or if not by tomorrow, that could set the stage for floor votes starting in the Senate and then to the more difficult House floor vote by the end of this week or perhaps early next week. House Republicans will be discussing the rumors of the deal in a previously scheduled closed-door session tonight. ***

*** The deal would lift the discretionary spending caps by $50 billion in FY2016 that started last October 1 and by another $30 billion in FY 2017. The higher domestic spending would be split evenly between defense and non-defense programs. ¬†An increase in the debt ceiling to a specified date rather than by an amount, to March 2017, would be part of the budget deal but may move on a parallel track attached to separate bill so it can be a “clean,” stand-alone increase without any riders or additional amendments that could derail it. ***

*** There is still the always tricky, last minute rush of policy riders that could be cut or dropped into the bill to woo the needed votes in both the Senate and House. And the larger political question is whether the out-going GOP House leadership can produce enough Republican votes to pass the deal, even mostly with Democratic votes, without more detail on the deal itself. We would stress that this risk cannot be completely known before the deal is put up for a vote in the House, but that the atmosphere of brinksmanship will help, rather than hinder, its adoption. ***

And if this deal does come off, it will be warmly received by the Federal Reserve — which begins its October meeting of the Federal Open Market Committee tomorrow — as it would mean one more risk to the recovery struck from its list of headwinds threatening its base case policy path for a first rate hike possibly as soon as at the December meeting (see earlier today SGH 10/26/15, “Fed: October Reset”).

Financing the Increased Spending

The financing of the higher spending is a bit vague at this point, but the thinking is that the money would be found through selling off a portion of the Strategic Petroleum Reserves and through commitments to keep Medicare and hospital costs under an existing specified spending cap.

And the higher defense spending would be kept off-budget in the Overseas Contingency Account. The House and Senate Republicans had already written the defense spending bill to include the increase in the OCA as a means to get around the sequester caps under the Budget Control Act of 2011, but the bill has been blocked by Senate Democratic filibuster.

Along these lines, it is hoped the deal once filed can clear a cloture vote without a filibuster to pass on the Senate floor, winning over Democratic votes with the long-sought increase in non-defense discretionary spending while the Republicans would get their desired increase in defense spending. Crucially, by offsetting the higher non-defense spending through the SPR sales and caps on Medicare and other hospital spending, resistant House Republicans can be won over as there would be no increase in the deficit or higher taxes.

There is a meeting scheduled of the House Republican Conference this evening, which was originally set to discuss the week’s legislative agenda and next moves on the debt ceiling. But we now expect the rumors of this two year budget deal to take center stage and to become a target for the members of the Freedom Caucus.

But ultimately, we think the House GOP leadership will press ahead to move forward with the bill if the deal does indeed come to pass and clears the Senate. The objective on the House floor, in effect, will be to win over enough Republicans that the GOP leadership can isolate the core dissidents of the Freedom Caucus and a handful of other fiscal conservatives and gain as many as 100 Republican votes on top of the 180 plus House Democratic votes that can be expected.

The Barn May Get Cleaned After All

The two-year deal would mark the culmination of five-way negotiations between President Obama, Senate Majority and Minority Leaders Mitch McConnell and Harry Reid, and House Speaker John Boehner and House Minority Leader Nancy Pelosi that we first highlighted several weeks ago (SGH 9/30/15, “Capitol Hill: New Talks, A Stormy GOP Leadership Race”).

It began with the push by the departing Speaker Boehner, who promised “barn cleaning” for his successor as Speaker in clearing the legislative calendar of difficult “must-pass” bills.

So there is probably no one keener to see the deal come through than Ways and Means Committee Chairman Paul Ryan, who is likely to be nominated as the House Republican candidate for the next Speaker of the House in the GOP Conference vote on Wednesday, followed by the full House floor vote on Thursday.

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