It’s a Crisis — a Budget Deal Looks Unlikely by June
Author: Greg Valliere
May 2, 2023
SINCE A DEFAULT is un-thinkable, there’s an increasing likelihood of “kick the can” — an extension that will last into the fall, perhaps coinciding with the end of the fiscal year on Sept. 30.
THAT WON’T SOLVE THE PROBLEM, OF COURSE: It would simply extend the crisis for a few more months, with the Washington dysfunction eating away at market and consumer confidence as uncertainty persists through the summer.
DURING THE PAST WINTER WE PREDICTED A 60-40 CHANCE OF A DEAL, but that forecast is looking shaky. Why? There’s no chance — none — that the House-passed budget deal could win enactment in the Senate, where leading Republicans are reluctant to get involved. In the House, a couple dozen hard-liners have no interest in raising the debt ceiling if the Senate modifies their bill.
WAIT UNTIL MAY 9: President Biden has agreed to talk with leaders of both parties next Tuesday, but even if there’s a tentative agreement on further talks and imposing some spending reductions, it won’t lead to a clean debt ceiling deal. Both sides will pledge to keep working, but an X date for default is perhaps only a month away.
WHAT’S NEEDED FOR A DEAL? That’s easy — a stock market meltdown or signs of a looming recession. Without a catalyst, Congress will continue to dither and posture. Are the markets worried about a default? Apparently not yet, but that could change by Memorial Day.
THE END GAME: Eventually the rough outlines of a deal will come into focus. It will raise the debt ceiling for only a year, it will cut billions, not trillions, in discretionary spending and it will impose caps on outlays for years to come. Both parties will hate the deal.
IN THE MEANTIME, the White House will consider options to raise the debt ceiling via executive orders or other gimmicks. By summer, some discretionary outlays may already face spending cuts, raising the issue of the whether the Big One — Social Security payments — might be on the table.
BY FALL THE MARKETS AND VOTERS will tire of scare tactics and will demand a deal; the threat of Social Security cuts or a humiliating default will lead to an agreement by the second half of the year. But for now there’s no deal in sight; wrapping up talks by early June is a huge stretch.
THUS WE THINK there’s a long road ahead between now and fall, as default fears persist and “kick the can” becomes the strategy. Neither party wants a deal now; they’re focused on their talking points, trying to move the polls.
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