Congress Isn’t Done With Fiscal Fights This Year

Congress Isn’t Done With Fiscal Fights This Year

With the months-long drama over raising the debt limit now over — President Joe Biden signed the Fiscal Responsibility Act of 2023 into law on Saturday, suspending the nation’s borrowing limit until 2025 — the political world will now return to "previously scheduled programming," as a Biden adviser described it to Mike Memoli of NBC News.

In large part, that means a pivot to the 2024 election. Yes, already. And yes, the election is still 17 months away.

"President Biden plans to use the bipartisan debt limit deal to pivot back to his shadow reelection campaign, pointing to the achievement to burnish his image with voters as a consensus-builder who’s making strides on his promise to unite the country," Memoli writes. "His plan is to pivot from a month that was consumed by the debt standoff in Washington back to talking directly with Americans about his economic agenda, particularly legislation he has signed to fund infrastructure projects and revive domestic manufacturing, as well as outline how he envisions building on those efforts, aides said."

Biden has already started that sales effort, citing the latest deal on the budget and debt limit as just one of 350 bipartisan laws he has signed as president.

That pivot does not mean that the fiscal fights are over for the year. As part of the deal to raise the debt limit, Biden and House Republicans agreed to create an enforcement mechanism that pressures appropriators to finalize and pass the 12 annual spending bills by the end of the year or see both defense and non-defense funding automatically cut by 1% from 2023 levels.

The last time all 12 bills were considered on the House floor separately was in fiscal year 2010 and Congress has not passed all 12 bills on time since fiscal year 1997. So it will be a challenge — one that may be made even more difficult by conservatives in the House who are still upset with Speaker Kevin McCarthy over how the debt standoff turned out. Those conservatives "can cause real problems for McCarthy over a budget resolution or appropriations bills," John Bresnahan and Andrew Desiderio at Punchbowl News report. "They’re fundraising against their own leadership’s failure to cut spending back to FY2022 levels. They’re angry that McCarthy relied on Democrats to pass the rule for the Fiscal Responsibility Act. And they’ll seek to blow something up soon."

In addition to the regular appropriations bills, Politico’s Daniella Diaz reports that House Republicans are expected to soon introduce "a comprehensive bill that would include tax breaks aimed at boosting economic growth." And defense hawks in the Senate set up another likely fight later this year when they demanded a vote on a standalone supplemental military funding as part of the agreement to speed the debt deal to passage. That additional spending would include more aid for Ukraine — a point of conflict for some Republicans — but will likely include other military funding as well. Democrats may also look to attach non-defense funding to any supplemental spending bill, raising the prospect that Congress could quickly revise both sides of the caps deal it just struck.

We might as well also note here that the 2024 election will be crucial not only for determining the direction of American democracy but, as David Dayen points out at The American Prospect, it will have major fiscal stakes: "The spending caps, the Trump tax cuts, including the changes to the Child Tax Credit, the boosted subsidies for the Affordable Care Act, and this debt ceiling suspension all expire after the election, in 2025."

Debt Limit Deal Has No Effect on US Credit Rating: Moody’s

The Fiscal Responsibility Act signed into law this past weekend by President Biden eliminates the risk that the U.S. could default on its interest payments, at least until 2025, when a temporary suspension of the federal debt limit is lifted according to the terms of the legislation. According to credit analysts at Moody’s Analytics, one of the three major firms that grade sovereign debt, the bipartisan deal to suspend the debt limit and cap spending is consistent with the company’s existing rating on U.S. credit, which stands at the highest level of Aaa.

"Overall, the FRA does not change our assessment of the US sovereign credit profile given the act's limited impact on the federal government's fiscal position, institutions and governance strength, and the broader economy," Moody’s analysts wrote Monday.

While the assessment may come as a relief in that it finds no reason to alter the U.S. credit rating, it does not give the country an entirely clean bill of health. The showdown over the debt limit reflects the risk of growing political polarization in the U.S., which produces weaker policymaking on fiscal issues compared to other wealthy nations. In making their assessment, Moody’s is simply saying that little has changed with respect to these ongoing negative factors — which together give the U.S. the weakest governance score of the 12 Aaa-rated nations.

Moody’s continues to warn of potential trouble ahead for the nation’s fiscal trajectory. "Over the medium term, widening fiscal deficits and declining debt affordability will increasingly weigh on the country's fiscal strength and be the main credit challenge to the sovereign's Aaa rating and stable outlook," the analysts wrote.

Modest effect on deficits: The FRA offers relatively limited deficit reduction, driven largely by budgetary caps that are locked in for two years and are not enforced for four years after that. The savings for the first two years — $69.5 billion in fiscal year 2024 and $112.2 billion in fiscal year 2025 — are small relative to both GDP and to future projected deficits.

The legislation provides little by way of revenue enhancements to further reduce deficits, Moody’s noted. One source of new funds is a partial clawback of money provided to the IRS to enhance enforcement — but that will end up costing more in lost revenue than any savings from the clawback, the analysts said, citing the Congressional Budget Office.

The lack of new revenues plays an important role in the concerns Moody’s has about the affordability of U.S. debt in the future. "Over the medium term, in line with rising US interest rates, we expect the ratio of federal interest payments to revenue to deteriorate from around 13.7% in fiscal 2023, already a high level compared to other Aaa-rated sovereigns, to around 25% in 2033, driven mainly by higher interest payments and comparatively weak government revenue growth," the analysts said.

Little economic effect: The reduction in spending outlined in the debt limit deal is relatively small, Moody’s says, and therefore will have little effect on macroeconomic variables such as growth, inflation or unemployment. Some low-income households will be affected by the federal work requirements, and the clawback of Covid-19 relief funds could be felt by some specific entities such as airports, but overall, the effects will be hard to detect.

Op-Ed of the Day: The Cost of Debt Limit Brinkmanship

University of Michigan Economist Betsey Stevenson reminds us that the showdown over the debt limit was not without costs, even if lawmakers ultimately agreed to a plan before the U.S. defaulted on its debt.

Although it’s too early to put an exact figure on it, Stevenson notes in The New York Times Monday that the showdown over the debt in 2011 cost the federal government billions of dollars largely due to increases in interest rates. "The cost to service our debts made more expensive by the crisis lasted for years, and one estimate suggests that it may have come in close to $20 billion," she writes. "When you head out for vacation, realize that Congress likely blew more taxpayer dollars on political fighting than they have appropriated to the National Park Service over the past five years."

Stevenson argues that the cost, which also involves lost economic growth from indiscriminate spending cuts and the waste of government resources, suggests that the best thing to do with the debt ceiling is eliminate it. "It’s long past time for policymakers to abandon debt ceiling shenanigans permanently and concentrate on responsible fiscal policymaking," she says. "Lawmakers across the aisle claim to want a stronger, more stable economy — but manufactured debt crises achieve the exact opposite."

Numbers of the Day

$22.9 Billion: The cash balance at the U.S. Treasury fell to $22.9 billion at the close of business on Thursday last week, a level that is dangerously close to zero given the size and variability of inflows and outflows on any given day. The balance edged higher on Friday, rising to $23.9 billion the day before President Biden signed the debt limit deal that eliminates the threat of default into law. But that’s still too close for comfort for many Treasury watchers, who are no doubt breathing sighs of relief as the department starts to refill its coffers now that the federal debt limit has been suspended.

$570 Million: Railroad crossings cause over 2,000 collisions each year, while also impacting first responders’ ability to reach emergencies in time. The Department of Transportation on Monday announced it awarded more than $570 million to fund 63 projects in 32 states to help reduce collisions and costly blocked crossings, with changes planned for more than 400 railroad crossings. Transportation Secretary Pete Buttigieg noted ins a statement that "commuters, residents, and first responders lose valuable time waiting at blocked railroad crossings – and worse, those crossings are too often the site of collisions that could be prevented."

The money is part of the $3 billion set aside for a five-year program under the 2021 Bipartisan Infrastructure Law.

As part of the grant program, the city of Pelham, Alabama will use $41.8 million to construct a bridge, avoiding two at-grade railroad crossings that have caused issues for first responders in the past. Broward County, Florida will use $15.4 million to upgrade safety measures for 21 railroad crossings on the East Coast Rail Corridor with a pattern of collisions with vehicles. Additional projects will be picked for the next four years of the grant program.

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