US Debt Ceiling: Forward Motion

Published on July 18, 2019

Treasury Secretary Steven Mnuchin told CNBC this morning from the sidelines of the G7 meeting in Paris that he, House Speaker Nancy Pelosi, and Senate Majority Leader Mitch McConnell are working out the final details to an agreement they have reached on the top line number to a two-year budget, with a two-year extension of the debt ceiling.

“I don’t think the markets should be concerned,” he added reassuringly, about the debt ceiling.

*** Secretary Mnuchin is echoing Speaker Pelosi’s optimism a deal will soon be done. But Speaker Pelosi and Senate Leader McConnell already worked out a deal months ago, only to see it held up by Acting White House Chief of Staff Mick Mulvaney. With President Trump yet to publicly comment on the talks one way or another, Mulvaney has introduced last minute demands for $150 billion in spending cuts, leaving the lead negotiators wondering to what extent Mulvaney, not Mnuchin, is speaking on behalf of the President. ***

*** We would not entirely discount a deal coming together in the next 48 hours. But the political signals from the White House indicate a small but rising risk the deal could still collapse altogether before the weekend. We believe in fact a more likely outcome is a rushed short duration debt ceiling bill that runs to no later than early October. It would be likely to prohibit Treasury from replenishing its coffers during the period, and would keep the fiscal heat on Congress through at least September. ***

*** Despite the near term uncertainty, we nevertheless remain confident that unless the political dynamics worsen considerably by then — admittedly, always a possibility — a two year Omnibus package will be passed by the end of September or early October (after some headline-grabbing short CRs) that is near certain to lift the budget caps in a “discretionary equivalence” to increases in both defense and non-defense spending, and with a longer duration increase in the debt ceiling attached. ***

Discretionary Equivalence

Treasury Secretary Mnuchin wrote a letter last week to  the congressional leadership warning the drop dead deadline date to increase the debt ceiling could be breached in early September rather than the more widely believed early October. That was the basis for bringing the budget negotiations forward to close a deal by the weekend and before the July 26 start to the long August recess to avoid the tail risk of an accidental US default in September.

Senate Leader McConnell, and Senate Appropriations Chairman Richard Shelby, have in fact been seeking a way to bring Mnuchin deeper into the negotiations as the lead negotiator on behalf of the Administration rather than Mulvaney, who is said to barely be on speaking terms with both the Republican and Democratic Hill leadership.

Focusing the broader budget negotiations on the narrower but existentially critical need to increase the debt ceiling, which falls under the jurisdiction of Treasury rather than the OMB, was the means to do just that.

As we noted above, Speaker Pelosi and Senate Leader McConnell essentially worked out an understanding for the top line numbers to a two-year FY2020-2022 budget with the discretionary equivalence of near matching spending increases in defense spending favored by Republicans and the non-defense discretionary spending favored by the Democrats.

That number is not yet public, but Speaker Pelosi had given her appropriations chairman their numbers to work with, and they have passed most of the 12 spending bills, with a total tally so far around $1.3 trillion and rising.

Senate Leader McConnell, on the other hand, is hobbled by a Senate Budget Committee budget resolution rushed through last May that, reflecting the President’s February budget blueprint, called for deep non-defense discretionary spending cuts with the proposed defense spending increases kept off budget in the Pentagon’s Overseas Contingency Account.

The Republican-controlled Senate Armed Services Committee, however, rejected the OCA fiscal sleight of hand outright, while McConnell held back from letting the budget resolution go to the Senate floor, knowing there were no more than a handful of Republican Senators who would vote for it.

McConnell and Shelby then shelved moving forward on any spending bills and instead turned to Mnuchin to help them circumvent Mulvaney and get directly to President Trump for his support on the two-year budget deal they agreed to with Speaker Pelosi and Senate Minority Leader Chuck Schumer.

Speaker Pelosi has already stated she is ready to move the debt ceiling legislation and budget agreement to a floor vote in the House. She is likely to have some 230 or more Democratic votes on the budget/debt ceiling deal even if a handful of Progressives rebel against higher defense spending, and she can count on anywhere from 100 to 150 House Republicans willing to vote for the deal, assuming that President Trump gives it his endorsement.

But along those same lines, McConnell is unable or unwilling to put a budget deal vote to the Senate floor without the sign-off from President Trump needed to provide the political cover for enough Republican votes so he does not have to depend on too many Democratic votes.

Thus the need to bring President Trump into the legislative equation, and that means the President throwing his considerable political weight in the Republican Party to Mnuchin.

Good Cop, Bad Cop

It is now being widely reported the negotiations are focused on how to pay for some of the spending increases through Mulvaney-proposed offsets of some $150 billion in spending cuts. But Mnuchin is not pressing very hard at all for the offset spending cuts, and both Pelosi and McConnell have stated the proposed discretionary spending cuts so late in the process are a legislative non-starter.

Likewise, both McConnell and Pelosi have already dismissed out of hand a proposed alternative to the budget deal now on the table in an unusually long one year CR that would keep federal spending at current levels. If for any other reason, it was flatly rejected because it would mean repeating divisive vote-losing fiscal battles going right into the elections.

Throughout these prolonged, stalled budget talks, it has been assumed that President Trump would not really want to run on spending cuts so draconian that, on top of the trade policy effects in slowing growth, they would risk pushing the economy into a stall speed if not recession in the election year.

That leaves the question of why the President is not moving more quickly to lend his political support to McConnell and Senate Appropriations Chairman Shelby, who a few weeks ago met with the President — with Mulvaney in attendance — to press the case for the two year budget deal.

We understand from Senate Republican sources their fear is that the President intends to string out the budget fight only to concede to the legislation from Capitol Hill for the higher spending in order to run in 2020 against the “free spending” Congress, Republicans and Democrats alike. In an echo of President Clinton’s successful “triangulation” in the 1996 elections, President Trump would also be the chief political beneficiary in the boost to growth such spending supports even as he criticizes it.

If President Trump does not intervene to openly back a compromise on the offsets by Treasury Secretary Mnuchin in the next day or so, the likely but far less attractive fall back is the short duration increase in the debt ceiling, perhaps only a few days into October if that. A short duration debt ceiling increase will of course leave the existential debt ceiling threat hanging over the budget negotiations when Congress returns on September 8.

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