The debt ceiling fight at its core is about federal spending levels, and at least the House will address those issues in crafting a budget and spending bills as precursors to a more final debt ceiling vote. (ddp)

As most know by now, the new Congress will feature divided government. Republicans will hold a slim four-seat advantage in the House, while Democrats will have an also slim two-seat majority in the Senate. Meanwhile, President Biden will complete his first term in the White House over the next two years and is positioning to run for re-election in 2024.

Divided government can sometimes yield productive agreements on pressing policy issues when there is the political will for lawmakers on both sides of the aisle to come together in a spirit of compromise. However, divided government more often is characterized by fractiousness and typically results in legislative gridlock.

We think that will be the case in this Congress given that we don’t detect that political will from the two parties to compromise and strike deals not completely on their own terms. Indeed, Congress got off to a bumpy start right out of the gate when it took 15 rounds of votes for the House just to elect a new Speaker.

With these dynamics in mind, we believe the following issues and developments will dominate Washington in 2023.

House Republican Speaker Dynamic. Amidst the theatrics of all of the floor votes, new House Speaker Kevin McCarthy (R-CA) had to agree to key concessions to secure the support he needed to become Speaker. Most notably, Speaker McCarthy agreed to a new rule that will allow any single House member, regardless of party, to demand a vote on removing the Speaker from his position. That provision could result in regular votes on the Speaker’s job status, which, in turn, could disrupt the regular functioning of the House. More fundamentally, the very threat of this action puts Speaker McCarthy into an effective straightjacket. If he isn’t able to accommodate all House Republicans, he runs the risk of being voted out of office. With daily threats to his job security, will Speaker McCarthy have a chance to govern effectively? This dynamic will play out in the most pronounced way in the fiscal policy issues mentioned below.

Budget, Government Spending Bills and the Debt Ceiling (all year). House Republicans have strongly stated the terms in which they will approve an increase in the debt ceiling and government spending for next year. They want reduced spending not only next year but over a ten-year period in an effort to balance the budget and slow the growth of the more than $31 trillion federal debt. They will have several opportunities to try to advance these goals over the course of this year. But, even if House Republicans are able to pass these measures out of the House, they will be non-starters in the Senate. With this stalemate, Congress will have real challenges in approving must-pass legislation like a debt ceiling extension and government funding. We cover the steps likely to unfold over the next few months in this regard.

  • Fiscal Year 2024 Budget (April). Congress is tasked with passing a budget resolution each year in advance of the government spending bills. However, it has become a less than regular occurrence over the past 20 years. The purpose of the budget resolution is to lay out a broad spending plan for the following fiscal year (and beyond). While Senate Democrats are unlikely to try to pass a budget resolution, House Republicans will try to pass one in April that will outline a plan to balance the budget in ten years. While budget resolutions are non-binding and don’t have the force of law, if the House is successful in passing a budget resolution, it will be influential in establishing priorities and setting parameters when they begin to write spending bills.

Passage of a budget resolution, which likely would happen in April, would be an important fiscal (and first) step in outlining and advancing House Republicans’ plans for significant spending cuts.

  • Spending Bills for 2024 (May – October). By September 30 of each year, Congress should approve government spending bills for the following fiscal year, though it often misses this deadline and needs to rely on passing a short-term continuing resolution to keep the government funded. This year may be different in the House because of the need to extend the debt ceiling. The House will try to pass its 12 separate spending bills to fund government agencies and functions no later than June. If the House passes a budget, that resolution will outline spending cuts they would look to implement in the spending bills. House Republicans will pair an extension of the debt ceiling to the spending bill(s). However, Senate Democrats will reject this approach and attempt to pass a separate and “clean” extension (with no attachments or extra provisions) by this time or earlier in the spring. Furthermore, the Senate likely won’t act on its spending bills until later in the year, possibly near year’s end, as it did last year.

Cutting through the different timetables for these bills, the threat of a default will emerge in June (if the debt ceiling isn’t extended) and the threat of a government shutdown will emerge in September.

  • Debt Ceiling (June – August). The current debt limit, last set by Congress in 2021, stands at $31.4 trillion. The current debt was reached today, according to Treasury Secretary Yellen. The Treasury Department will now use “extraordinary measures” to cover its spending and debt obligations for a period of time, likely until this summer. This “X-date,” the day Treasury will exhaust those extraordinary measures and face default, will be announced by the department in the coming weeks and may be revised over the next few months depending on such factors as the pace and volume of tax receipts and the timing of certain spending. This X-date will be the key date by which Congress must act or risk a default . This is when the showdown between House Republicans and Senate Democrats (and President Biden) likely will reach its apex and will have to be reconciled one way or the other. While it’s not uncommon for lawmakers to try to add provisions to a debt ceiling increase, it is uncommon for a debt ceiling increase to include the kind of comprehensive agreement on federal spending that House Republicans want. The rhetoric on both sides about what it will or won’t accept as part of a debt ceiling extension suggests that there is no plausible solution as of today. About five months separate today from the X-date.

This issue will be extremely fluid over that time.We are confident the debt ceiling will eventually be extended, but exactly when and under what circumstances are unknown to us as of now.

For more on significant congressional oversight and investigations, taxes, immigration and other policy issues, see the Full Special Washington Update, 19 January, 2023.

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Expiration: 1/31/24

Approval date: 1/19/2023

Review Code: IS2300355