Real Debt Ceiling Debate to Begin.

At an appearance before the New York Stock Exchange, House Speaker Kevin McCarthy (R-CA) put forward a plan to extend the debt ceiling as part of a broader legislative package that would include significant deficit reduction measures. The political reality is that House Republicans must demonstrate their ability to pass this bill in order for Senate Democrats and President Biden to take them seriously enough to begin negotiating a deal. House Republicans aim to pass their bill late next week, but a vote could possibly spill into May if Speaker McCarthy does not have the necessary votes by next week. We believe House Republicans will pass a bill, though there will be plenty of intra-party fighting over its specific provisions from now until then (current bill provisions can be found here). This plan certainly will not be the final one to extend the debt ceiling, but its passage in the House at least would mark a starting point for the difficult bipartisan negotiations that hopefully will yield a final resolution.

Tax Day and X-date.

Now that Tax Day has passed, we expect Treasury Secretary Janet Yellen to soon announce the X-date (the effective date when the government will no longer be able to pay its bills). The milestone of Tax Day is significant as incoming tax revenue will allow Treasury to calculate and hone in on the X-date, which will serve as an effective deadline by which Congress will need to act to extend the debt ceiling in order to avoid a default. The announcement of this date could coincide with the aforementioned upcoming House action on the debt ceiling. The combination of the two should be a catalyst for negotiations between the Biden administration and House Speaker McCarthy that will intensify as we get closer to the X-date. The negotiations should result in a deal, but the process will be difficult and highly political. Though it is unclear exactly what a final deal will look like, what is clear is that the process will be contentious and unlikely to bear fruit until very close to the X-date.

A Third Way?

A bipartisan group in the House has proposed a solution outside of what most Democratic and Republican lawmakers have advocated. The Problems Solvers Caucus, which is comprised of 64 members split evenly between members of both parties (32 Democrats, 32 Republicans), has proposed a plan to provide a short-term extension of the debt ceiling (through the end of December) to provide time and a mechanism for deficit reduction efforts. Under the plan, an independent commission would be charged with recommending ways to reduce the budget deficit and Congress would be required to vote on the commission’s proposal by February 2025 (after the 2024 elections). The short extension to December would allow Congress a window to first resolve in the fall government funding bills for fiscal year 2024. The hope is that those efforts could result in some spending reductions or controls that could be a part of a longer debt ceiling extension solution. This proposed solution isn’t plausible at this early stage where most lawmakers and the President will stick with their more partisan positions, but it could be an appealing fallback option as the X-date approaches and other proposals fail to gain traction.

For more, read Washington Weekly 21 April 2023.