One looming issue is the need to raise the debt ceiling in order to avoid a catastrophic default. (UBS)

Lame Duck Session. Congress will work over the next six weeks to try to wrap up remaining legislative priorities. The first order of business will be the extension of government funding beyond its current expiration date of December 16. This debate will feature partisan wrangling over the composition of funding and the possible inclusion of controversial riders. The other must-pass item for Congress is the annual defense authorization bill, which has been passed on time for 61 consecutive years. There also will be interest in passing bills on consumer privacy protections, restrictions on the technology sector, reforms to the electoral college and energy infrastructure permitting reform (after a controversial provision on that was excluded from a short-term government funding extension Congress passed in September).

Though Congress sometimes has greater appetite for bipartisan agreements after an election, most of the aforementioned bills (other than government funding and defense authorization) will be kicked over into the new Congress in 2023.

Government Funding Bill. Congress needs to pass a government funding bill before current funding expires on December 16. Lawmakers will likely work right up to that deadline to secure a compromise bill. Given the need for a bipartisan agreement, this will be a challenging exercise. There is wrangling over specific funding priorities, with Democrats generally seeking more money for domestic programs and Republicans generally seeking more in defense spending. The alternative to the passage of a bill—a government shutdown—is sufficiently unattractive to nearly all lawmakers that a compromise agreement should come together. The big question is the duration of new spending. Will it cover the entire fiscal year (through September 30 of next year) or will it last only a month or two to allow the next Congress to craft a new bill?

The latter scenario seems more likely to us at this time, and we expect another donnybrook over government funding to occur early next year in divided government.

Key Election Takeaway. The support of independent voters was able to tip the scales for Democrats in various House and Senate races. These important voters helped lead Trump to victory in 2016, Democrats in 2018 and Biden in 2020. They were widely expected to deliver more votes for Republicans this year due to historical trends favoring the political party out of power and the President’s current low approval ratings. That changed when many of these voters decided that their concerns about Trump and threats to democracy were more important than those about Biden, inflation and crime. It’s not clear whether this was the prevailing sentiment throughout the campaign season or whether it was a development that occurred closer to election day. Going forward, the importance of these independent voters in key swing states should play a role in determining who comes out of the party primaries (particularly on the Republican side) in 2024. Some Republican voters and leaders are already moving away from a Trump candidacy and it’s hard to imagine that this trend won’t continue over the next few months.

While Trump could enter the Republican primary as the favorite, he will face stiff competition.

Debt Limit. One looming issue is the need to raise the debt ceiling in order to avoid a catastrophic default. The current debt limit, which was last set by Congress in 2021, stands at $31.4 trillion. With federal debt recently surpassing $31 trillion, the government will be bumping up against that limit early next year, though the Treasury can and will deploy cash management tools called extraordinary measures to stave off a default for additional months. In the last 10 – 15 years, raising the debt ceiling has gone from a perfunctory process to a highly fraught political exercise that has at times sent markets careening. Republicans will look to extract budgetary concessions (reforms to entitlements and/ or cuts to domestic spending) to which Democrats, including President Biden, will be very resistant. To avoid the brinksmanship next year, there will be a push to increase the debt ceiling in the lame duck session next month. Democrats could try to pass it on their own through the reconciliation process, but there isn’t sufficient time for that. Alternatively, a debt ceiling increase could be incorporated into the must-pass funding package, but that would require the votes of at least ten Republicans in the Senate.

Given that this Republican support is unlikely to be forthcoming, markets should plan on debt-limit drama next year.

Main contributor: John Savercool

For much more, see Washington Weekly, 18 November, 2022.

Approval Date: 11/18/2022

Expiration: 11/30/2023

Review Code: IS2206680