With the debt ceiling debate likely to dominate May-June, we will send out weekly trackers on the issue as developments occur (during the mid-week).
The Bottom Line
The Bottom Line
- Meetings continued this week among the principal negotiators (and President Biden), but there is still no clear path to a final deal.
- On Monday, Treasury Secretary Yellen reiterated that the X-date is in “early June and as early as June 1.” Negotiators therefore continue to work off of June 1 as the effective X-date. The Secretary will provide another X-date forecast on May 29, and it is possible she could provide an updated X-date to be sometime later in June.
- While Democratic negotiators have now put potential tax increases on the table for discussion, we don’t expect any significant tax changes to be included in any final deal.
- The primary sticking point in the negotiations concerns the level of caps on the growth of future federal spending. There is discussion about having caps on some federal spending over the next two or three years (instead of the ten-year period contained in the bill passed by House Republicans). The biggest areas of disagreement appear to be on the level of the caps (what would be the maximum annual increase in percentage terms) and on the scope of funding subject to such caps. We think caps on the growth of federal spending in the range of 2%-4% over two or three years is a possible landing spot.
- In addition to some type of spending caps, other items likely to be part of a final deal include a reclamation of unused Covid funds and energy infrastructure permitting reforms . There isn’t final agreement on these items either, but they are viewed as much more manageable to resolve. Enhanced work requirements for some food-stamp beneficiaries also could be included in a final plan despite strong resistance from Democratic negotiators.
- We think the following items will not be included in a final deal: tax increases on higher-income individuals and businesses; new border enforcement spending; elimination of President Biden’s student loan forgiveness program; elimination of provisions from the Democrats’ Inflation Reduction Act (including green energy tax incentives and funding); and, elimination of enhanced IRS hiring and enforcement.
- The House’s debt ceiling extension bill passed on April 26 is a non-starter in the Senate and with President Biden.
- At present, we don’t see any debt extension bill (including the clean extension favored by Democrats) that could pass in the Senate without a negotiated settlement.
- A third way will have to be found.
- A final bill will have to be bipartisan (given procedural hurdles, 60 votes will be needed in the Senate), which all of the negotiators have acknowledged.
- A final bill will contain only modest deficit reduction measures.
- We believe a final bill will pass and become law no later than the X-date.
- Significant progress needs to be made during this week and the upcoming weekend. Failure to come to a deal by the end of this weekend will make the June 1 deadline very difficult.
- More closed-door staff-level negotiations will occur with greater intensity and frequency.
- As we get closer to the X-date, adverse market reactions to a lack of progress will put pressure on negotiators to compromise. Unfortunately, this may be the most important and necessary catalyst for a deal.
- Some policymakers – but not the negotiators or Treasury officials – are speculating over potential Treasury debt and bill payment actions if a deal is not struck by June 1. A focus on these actions underscores the growing nervousness that some have with regard to the ability of Congress to act by June 1. Behind the scenes, Treasury is certainly preparing for this possibility.
- Many congressional Democrats continue to urge President Biden to invoke the 14th amendment to the Constitution and ignore the need for Congress to extend the debt ceiling. This option doesn’t seem reliable to us (and most relevant officials in Washington) because of its legal uncertainty and the lack of time for an official legal review and ruling, possibly by the Supreme Court. Following the current crisis, this issue needs to be clarified in a precise way to apply to future debt ceiling battles. There is also a belief here that the use of the 14th amendment would trigger a very negative market reaction.