May Madness — Debt Ceiling Timetable is Shifting
Author: Greg Valliere
March 27, 2023
WITH CONGRESS BACK IN TOWN, the focus will shift to the stalled budget talks, which most experts thought would reach crisis stage by July or early August. But the need to throw billions of federal dollars at ailing banks has gobbled up cash and moved up the debt ceiling deadline.
THE DEBT CEILING MAY HAVE TO BE RAISED by the end of May, joining a long list of major crises this spring: shaky banks, Donald Trump indictments, the threat of recession, rising geopolitical tensions, etc.
REPUBLICANS WHO HAVE BEEN WORKING ON A DEBT COMPROMISE have reached a grim conclusion: a balanced budget is many, years away without a deal on Social Security and Medicare cuts — a non-starter. And there’s not enough money to extend the Trump tax cuts when they expire in the middle of this decade.
NEVERTHELESS, THE ROUGH OUTLINE OF A GOP plan on spending cuts is coming together. A mid-April target date will be delayed, but by May the plan will include deep spending cuts, according to House Budget Committee Chairman Jodey Arrington (R-Tex.), suddenly a major player in the debt talks.
REPUBLICANS PLAN TO PROPOSE cutting $130 billion from domestic agency accounts next year and then capping that spending at 1% growth annually for a decade, the chairman said. The conservative House Freedom Caucus has endorsed such a cap. The GOP plan could also include strengthening work requirements for poverty programs like food stamps for able-bodied adults without children.
THESE PROPOSALS HAVE LITTLE CHANCE because there will be several exemptions: defense spending, entitlements, veterans spending — and most importantly, a veto threat from President Biden. But the Republian plan is a start, and if a deal on spending can pass, a deal on the debt ceiling can as well. The key will be spending caps.
WE’LL STICK WITH OUR PREDICTION that there’s a 60-40 chance that a debt ceiling crisis will be avoided just days before a possible default. Before then, several gimmicks will be considered and rejected, including a plan that would only cover high-priority spending, and a $1 trillion coin that would magically solve the debt crisis.
AS A DEFAULT LOOMS, negotiations with Treasury Secretary Janet Yellen will heat up — but she has lost credibility in the wake of confusing comments she made last week on bank bailouts. The deal will have to come from the politicians, complicated by adamant House radicals, who don’t want any deal. That’s the major reason why we think — nervously — that there’s only 60% chance of avoiding default; 60% is a little too close for comfort.
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