US Fiscal: This Week's Plan

Published on October 7, 2013

In the first week of the partial government shutdown, embattled House Speaker John Boehner mostly maneuvered to buy time to keep his House GOP conference unified while exhausting the mutiny of his defiant Tea Party faction. But the Speaker and the House Republican leadership are now preparing a final version of the legislation which should emerge soon that must originate in the House to reopen the government and to increase the federal debt ceiling.

They are meeting with the rank and file right now over lunch, which will be followed by a closed door leadership meeting to go over whip counts to help shape the final version of what will go into the final CR and debt limit legislation. That is likely to be brought to a floor vote well before the end of this week.

A few points on the current state of negotiations and plan of attack over the next few days:

*** As of Monday morning, Speaker Boehner still does not have the 217 Republican votes he needs to move bills out of the House to the Senate without depending on Democratic votes. The speaker will not put the (mostly) clean CR to the floor for a House vote, period. And the House Democratic efforts to use a “discharge petition” to force a CR vote has and will likewise go nowhere. We likewise expect a Senate effort to pass its own debt ceiling bill without waiting for the House version to also falter. ***

*** Boehner has been trying to pivot the fight back to purely fiscal policy issues — albeit the same issues that have derailed budget talks since April — to create some running room to gain the numbers he needs to isolate the core 10 or 12 member Tea Party “suicide caucus,” as the other Republicans have dubbed those still demanding an all or nothing showdown to defund Obamacare (see SGH 10/3/2013, “US Fiscal: Bigger is Better, Sometimes.” ***

*** On that front, his efforts may have been boosted by President Obama’s apparent signal this morning that he would be willing to accept a short term debt ceiling extension, an offer that must be infuriating Senate Majority Leader Harry Reid, who has been holding the Democratic ranks to a hard line stance against negotiations. ***

*** No decisions have been made yet on what will be included in the CR and debt ceiling language to clear that 217 vote hurdle, and for that matter, it is still undecided whether this final legislative push will comprise two separate bills sequenced closely together or packaged as one bill to make it harder for the Senate to strip. It is, however, still likely to still include a repeal of the medical device tax as a token fig-leaf to the Tea Party holdouts and which has in fact had strong support among Senate Democrats. ***

*** Reflecting Boehner’s pivot back to fiscal issues, the bills or bill are highly likely to include some entitlement reform measures already advocated by the President like the chain-weighted CPI or even means testing Medicare, and some form of a procedural “mechanism” to map out a path to future revenue-neutral tax reform negotiations – someday. The House legislation will still be set at its original $986.3 billion annualized spending level, though the Senate is almost certainly going to demand and get a higher spending level in the final version. ***

*** Crucially, the length of the debt ceiling increase, mirroring the President’s offer this morning to accept a short term increase, is likely to be linked to the duration of the CR, probably the Senate version of the November 15 end date (see also SGH 10/3/2013). By some miracle, there might be a momentous breakthrough with a CR that runs all the way to the end of the FY2014 next October or even beyond the elections, but we doubt it. And so the Senate and House will gear up for the next round as Thanksgiving or Christmas approaches. ***

Negotiations Are Already Underway

Whatever the final language, the CR and debt ceiling will be invariably linked in one way or another to garner the votes needed in the House. And as much as the President and Senate Majority Leader Harry Reid insist they will not negotiate while being held hostage with a shutdown over the lost cause of defunding Obamacare (fair enough to be sure), those negotiations have in fact already begun – witness Obama’s gesture this morning.

Once Boehner and his leadership are able to move the CR and debt ceiling increase — in whatever their final form — the center of gravity in those negotiations will move to the Senate. And for all the Senate Majority Leader’s pummeling of Boehner as he struggles to find his majority, Reid will soon need to navigate his way through at least three differing blocs of Senate Democrats and a necessary handful of Republicans to find the votes to pass what will inevitably be a Senate-amended CR and debt increase to then ping-pong — again — back to the House.

While we do think the Speaker will be able to find the right mix of demands to clear a CR and debt ceiling increase out of the House by late this week or early next, when it comes back to him from the Senate is when Boehner will face his moment of truth.

To safely clear the debt ceiling increase and re-open the government, he will clearly want to have enough Republican numbers nailed down to pass what comes back from the Senate with at least 217 Republican votes. Without that, he will lose even more of the leverage he has already lost in placating the Tea Party demands, and that he still needs for the next round of the fiscal negotiations.

He just may not have the numbers within his own caucus for the second round, but if he does clear a ping ponged bill with only a handful of Democratic votes, it will probably be enough to declare victory in this latest round of steering his Tea Party-riddled Speakership from disaster.

But success in re-opening the government and increasing the debt ceiling, probably by a shorter rather than longer time frame, will not come much before the end of next week, or as we have been warning, a few days past the October 17 initial deadline date before Treasury funding becomes much trickier and the costs of an accident that much politically and economically higher.

That, of course, is going to be weighing heavily on the Federal Reserve when it meets next at the end of this month. However much some FOMC voters would still like to get the tapering underway, the immense near term uncertainty over the extent of the fiscal retrenchment will not be lifted with the likely deal on Capitol Hill later this month, but may run into next year with the fiscal drag of the unaddressed sequestered level spending cuts.

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