With McConnell in Hospital, Spending Fight Gets Even More Complicated

McConnell, in a picture from May (Reuters)
By Yuval Rosenberg and Michael Rainey

Happy Thursday! Here's what we're watching tonight.

McConnell's Absence Could Complicate an Already Difficult Spending Fight

Sen. Mitch McConnell has been in the hospital since June 14 for undisclosed reasons, and his continued absence from the Senate could further complicate an ongoing fight over defense spending and Congress's annual spending bills.

As Politico and The Washington Post reported this week, the 84-year-old McConnell's hospitalization comes at a time when the annual appropriations process has gotten bogged down in the Senate. Democrats and Republicans are clashing over the Trump administration's push to boost defense spending to an unprecedented $1.5 trillion.

The top Senate appropriators, Republican Susan Collins and Democrat Patty Murray, have worked closely together on annual spending plans in past years, but they're at loggerheads this year over funding levels, including GOP plans for a $1.15 trillion budget for the military and another $350 billion that Republicans want to deliver via a third party-line budget reconciliation bill.

"Democrats have refused to support the increase in defense funding Republicans have put forward without a comparable boost for domestic programs," the Post's Jarrell Dillard and Noah Robertson write today. "That disagreement is part of the reason the committee, which normally advances these measures on a bipartisan basis, has not yet advanced any legislation for fiscal 2027."

Appropriators also face disagreements over an $87.6 billion supplemental funding request from the White House, including $67.1 billion related to the Iran war.

Against that backdrop, McConnell's absence could further hamper the Senate's ability to push forward on spending bills. The veteran Kentucky senator sits on the Appropriations Committee and heads that panel's defense subcommittee, which oversees military funding.

"If the two sides can't come to an agreement, Republicans will probably need McConnell's support to advance any spending bills out of the committee amid Democratic opposition," Dillard and Robertson note.

Without McConnell, the 15-14 GOP edge on the committee turns into a 14-14 split that allows Democrats to prevent spending bills from advancing as they insist on first reaching a deal on overall spending levels.

Collins, who chairs the Senate Appropriations Committee, already had to postpone the scheduled June markups of several appropriations bills due to the standoff over defense spending. McConnell's absence forced another delay late last month.

McConnell's absence could also present an additional obstacle for Republicans if they do try to pass a long-shot reconciliation bill. Without McConnell, Senate Republicans could only afford to lose two of their members as they try to clear a 50-vote threshold.

McConnell has challenged the wisdom of funding critical defense priorities via a reconciliation bill rather than the usual bipartisan appropriations process. He has also expressed serious doubts that a third party-line bill will happen. "I think it's safe to conclude there will not be another reconciliation bill, so it's really not an option," McConnell said at a Senate Appropriations hearing a month ago. But as a defense hawk, he would be expected to help such a funding package pass.

The bottom line: This year's appropriations process has been bogged down by deep partisan differences over spending levels and, undoubtedly, by political calculations about how congressional control and leverage over funding decisions might change after the November elections. When Congress returns next week from its recess, lawmakers will have precious little time to agree on annual spending bills - or at least a stopgap measure to avoid a potential government shutdown that would occur when current funding expires at the end of September.

Deficit Nears $1.4 Trillion in Fiscal Year 2026

The federal budget deficit totaled $1.37 trillion in the first nine months of the current fiscal year, according to the latest monthly budget review from the Congressional Budget Office.

The deficit estimate for 2026 surpasses the deficit of $1.34 trillion recorded over the same time period in 2025. The deficit is now about $35 billion higher.

Receipts in the first nine months grew by $142 billion year-over-year, rising to $4.15 trillion, CBO estimates. Higher income and payroll tax revenues drove the increase, along with raised tariff rates, which helped boost customs duty collection by $55 billion, or 51%. The rise in total receipts was partially offset by a decline in corporate income taxes, which fell by $86 billion, or 24%.

Outlays grew more than receipts, rising $178 billion to $5.52 trillion. Spending on Social Security, Medicare and Medicaid rose by $169 billion, or 7%, compared to the year before. The cost of interest on the national debt rose by $98 billion, or 13%, driven by both a larger debt and higher interest rates. Outlays for defense rose $30 billion, or 5%.

There were some reductions in spending in specific areas. Outlays by the Department of Education decreased by $55 billion, or 55%, driven by a reduction in the estimated costs of outstanding student loans. Other departments seeing spending declines include the Environmental Protection Agency (down $20 billion, or 61%), the Department of Homeland Security (down $13 billion, or 15%) and the Department of Commerce (down $10 billion, or 51%).

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said that the deficit in 2026 will likely continue to run ahead of the 2025 numbers.

"After the deficit coming down between FY 2024 and 2025 due to the administration's tariff revenue and some one-time changes in spending, the new tax cuts and spending increases are now pushing the deficit above last year's level," MacGuineas said in a statement.

Fed Announces Leaders of New Task Forces

Federal Reserve Chairman Kevin Warsh said in June that he planned to create new task forces charged with reviewing how the central bank operates in five key areas. On Thursday, the leaders of the groups were announced.

"The U.S. economy has changed significantly over the last generation, and never more so than right now," Warsh said in a statement. "Each task force will carefully consider whether policymakers' means and methods, analytical tools and policy approaches can be improved upon. I am honored that the best minds from a range of disciplines have agreed to work with us to sharpen our performance as an institution. The goal is straightforward: to ensure the Fed is best positioned to achieve our objectives in this consequential time."

Warsh said the co-leaders of the task forces would work independently, with support from Fed staff, "with a mandate to follow the evidence, provide candid feedback, and produce rigorous findings for the Federal Open Market Committee."

The five committees and their leaders are:

Communications: Review how the Federal Reserve conveys policy deliberations and decisions amid uncertainty.

Co-leaders: Peter R. Fisher, professor of practice, Foster School of Business, University of Washington; Arminio Fraga, founder and chairman, Gávea Investimentos, former president, Central Bank of Brazil; Mervyn King, former governor, Bank of England.

Balance Sheet Policy: Examine the costs, benefits, and institutional implications of the Federal Reserve's current balance sheet regime.

Co-leaders: Karen Dynan, professor of economics, Harvard University; Raghuram Rajan, professor of finance, University of Chicago Booth School of Business, former governor, Reserve Bank of India; Jeremy Stein, professor of economics, Harvard University, former governor, Federal Reserve Board.

Data: Improve the quality and timeliness of real economic signals that inform the Federal Reserve's policy judgments.

Co-leaders: Raj Chetty, professor of economics, Harvard University; Doug McMillon, former president and CEO, Walmart; Kevin Murphy, professor of economics, University of Chicago.

Productivity and Jobs: Assess the economic impact of new general-purpose technologies, including artificial intelligence, to inform the Federal Reserve's policy judgments.

Co-leaders: Marc Andreessen, cofounder and general partner, Andreessen Horowitz; Charles I. Jones, professor of economics, Stanford University, currently on leave at Anthropic; Asha Sharma, executive vice president and XBOX CEO, Microsoft.

Inflation Frameworks: Revisit how the Federal Reserve understands and responds to the drivers of inflation.

Co-leaders: Greg Mankiw, professor of economics, Harvard University, former chairman, Council of Economic Advisers; Thomas Sargent, professor of economics, New York University, Nobel laureate; William White, senior fellow, C.D. Howe Institute, former economic adviser, Bank for International Settlements.

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