Key Element of a Deal is Coming Into Focus
Author: Greg Valliere
May 23, 2023
THERE’S BEEN PROGRESS on a wide range of issues, such as clawing back Covid aid, denying welfare benefits to people who are unwilling to work, and reforming “permitting” rules for energy projects. The negotiators are about halfway toward a deal, in our opinion — with one very big wild card.
THE WILD CARD: CAN JOE BIDEN AND KEVIN McCARTHY convince their troops to agree on the deal that’s starting to take shape? Democrats are increasingly leery of Biden’s willingness to compromise on spending cuts, while Republicans say McCarthy has not stuck with the spending bill passed by the House in April.
ACCORDINGLY, SEVERAL DAYS OF ARM-TWISTING will be necessary, but the center probably will hold, even as activists on the right and left seek amendments to a final bill. Can the final legislative language be written by June 1? Very unlikely. Can it be written by June 8-9? Possibly, if the X-date — default — slides into early June.
THE GOOD NEWS is that both sides are talking and genuinely don’t want a default. The bad news is that any one issue could snag the negotiations; for example, a reduction in IRS funding and enforcement could drive the Senate away from a deal. These House-Senate negotiations could take several days.
IN THE MEANTIME, FINANCIAL MARKETS probably won’t have to worry about the 14th amendment to the Constitution, which looks gimmicky and would be immediately challenged in the courts. What the markets may have to worry about is the glacial process that is common in bills of this magnitude.
ONCE A TENTATIVE DEAL IS REACHED, it could take at least several days for it to crawl through Congress. McCarthy said he planned to give House lawmakers 72 hours to read the bill, a rule that was put in place at the beginning of this Congress. Lawmakers will likely want to introduce amendments to any agreement as well. A “kick the can” extension, perhaps into late June, still looks likely.
ALSO COMPLICATING THIS PROCESS is the sudden insistence by Democrats that some revenue-raising tax provisions should be included. But McCarthy has been adamant that tax increases are off the table, even though polls show the public would happily accept higher taxes on corporations and wealthy individuals. Our take is that when the carried interest provision — always a long-shot — is injected into the debate, there’s not going to be a serious tax threat.
SO IT ALL COMES DOWN to spending caps. McCarthy has said spending in the coming fiscal year must be lower than it is this year. The White House has proposed keeping nondefense and defense discretionary spending flat from fiscal 2023 to fiscal 2024, with a 1% increase in fiscal 2025. Does this mean defense finally will get a haircut? Yes, but there will be plenty of opportunities for emergency defense spending.
THIS RAISES A KEY ISSUE that has barely been discussed. Does this deal have an enforcement mechanism? What if Republicans lose the House and Senate in the next election? Just as laws can be passed, they also can be rescinded, which would be the fate of this bill if control of the House shifts in the next election.
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