US: Edging Towards Debt Ceiling and Budget Deal

Published on July 22, 2019

Negotiations are moving very rapidly this morning between the Congressional Democratic and Republican leaderships on a much-prized agreement with the White House for a two-year budget and debt ceiling deal.

*** While there remain high anxieties whether it can done in time this week, we do now think the odds are rising a deal will be reached no later than Thursday, and perhaps announced as soon as later today. Key will be whether the final compromise language over offsetting spending cuts can be hashed out this afternoon. ***

*** If there is indeed going to be a deal on the budget and debt ceiling this week, we expect the White House demands for $75 billion spending cuts will be pushed into the “out years” of the CBO scoring, meaning there will be no “real” spending cuts in the politically important next two fiscal years. ***

Some of the backdrop to the negotiations:

** As we noted last week (SGH 7/18/19, “US Debt Ceiling: Forward Motion”) House Speaker Nancy Pelosi, Senate Majority Leader Mitch McConnell, and Treasury Secretary Steven Mnuchin have already essentially worked out the basic framework to the deal that will comprise a two-year budget with near equal spending increases in defense and non-defense discretionary spending and an extension in the debt ceiling to September 2021.

** The top line for the FY2020 discretionary budget has yet to be made pubic, but we understand it will eventually total around $1.450 trillion in discretionary spending; that would translate into about $50 billion to $100 billion in additional discretionary spending over the Bipartisan Budget of 2018 and some $320 billion over the sequestered levels of the Budget Control Act of 2011.

** There is no deal, however, until President Trump gives it his green light. Senate leader McConnell has made it clear he lacks the GOP votes to pass an eventual Omnibus package with the spending increases without the political cover from President Trump. While we believe the President will give his green light this week there is still a one in four risk the deal falls through.

** The main obstacle to the budget and debt ceiling deal has come from Mick Mulvaney, the White House acting Chief of Staff and acting head of the Office of Management and Budget as well, who has strenuously opposed the spending increases drafted out by Speaker Pelosi and Senate Leader McConnell, and has instead argued for deeper spending cuts in the next fiscal year of up to $150 billion.

** On that score, Mulvaney has drawn political support from the Mark Meadows and Jim Jordan, leaders of the conservative House Freedom Caucus, with whom the President is said to have been in close and frequent contact in recent days.

** We understand the proposed spending cuts have since been whittled down to $75 billion in the discussions over the weekend, but the issue remains a key sticking point. Meanwhile the various “poison pills” the Democrats proposed, such as limiting the White House ability to move federal funds around in order to pay for the “border wall” — have been more or less dropped.

** We also understand the key compromise to keep a deal intact by the end of this week will be legislative language that pushes the $75 billion in spending cuts into the “out years” of the eventual CBO scoring of the budget on a ten-year base line. We suspect President Trump will agree to the compromise language.

** Any real cuts in spending, whether $75 billion much less $150 billion, would be a deal killer for Speaker Pelosi and the House Democrats. Less publicly, it would likewise be the same for Senate Leader McConnell and the powerful senate Appropriations Chairman Richard Shelby.

** A key plank to the working agreement reached between the House Democrats and Senate Republicans since the beginning of the budget process in the early spring has been a “discretionary equivalence” template, in which there would be a dollar for dollar near matching in the increased defense spending sought by the Republicans and the non-defense social spending demand by the newly empowered House Democrats (SGH 3/7/19, “Capitol Hill: The Bar Tab is Open”).

** A failure to nail down a Presidential green light on the deal before Thursday — in order to rush through the bill before the long August recess that begins for the House this Saturday and the Senate on August 2 — would push the negotiations into September after Congress returns September 9. But that would put the debt ceiling in play into the early to mid-September “drop dead” date Treasury Secretary Mnuchin has warned could trip the US into an accidental default.

** If the budget and debt ceiling agreement does fall through this week, we understand Speaker Pelosi is prepared to rush through a short duration bill extending the debt ceiling into early October, and has even indicated to Mnuchin he can pick the date — but no later than the first few days of October to ensure maximum political pressure to pass the two-year budget with its spending increases.

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