The Washington brief

Executive summary

• The House passed a debt ceiling increase bill on Wednesday evening. Passage of the bill was a huge win for House Republicans and Speaker McCarthy and the bill’s contents reflect their first offer.
• However, this bill is ultimately bringing in an element of chaos into the debt ceiling debate. Oddly, this one “step forward” in the process may amount to two steps back (or worse) for getting a debt ceiling deal done and quickly signed into law. Where only House Republicans were involved before, going forward in negotiations, House Republicans are now joined by the Biden Administration, Senate Democrats, House Democrats and Senate Republicans.
• With a clean extension off the table, the door opens for whatever package of changes that can gather a majority in both houses. The number of combinations of budget and program changes is almost limitless.
• Absent raising the debt ceiling, the U.S. is expected to hit its legal debt limit sometime between June and September (often referred to as the “X date”), depending on the amount of federal tax receipts collected this year.
• We continue to view a default on U.S. debt as unlikely. However, we also foresee the likelihood that a prolonged debt ceiling debate – and the potential for fiscal austerity – would rattle financial markets. Ultimately, while it will likely be a rocky road fraught with significant political peril, we expect a debt ceiling extension with modest reforms will be enacted before the August recess.

Our take

The House passed a debt ceiling increase bill on Wednesday evening. Oddly, this one step forward in the process may amount to two steps back (or worse) for getting a debt ceiling deal done and quickly signed into law. While the bill passed the Republican controlled House, it would not pass in the Senate, and it would not pass muster with the Biden Administration. As things stand now, by moving a bill, the House Republicans merely got themselves a seat at the negotiation table and the bill’s contents reflect their first offer.

Ironically, if the House vote had failed, it is likely that the process to enact a debt ceiling extension would have been shorter and more direct. A failed vote would have resulted in immense pressure for a vote on a clean debt ceiling extension to avoid default. With no other alternatives on the table, House Republicans would have joined Democrats in support of an extension and the Senate would have moved on a bipartisan basis as well. This point is important because the “X” date, when the debt ceiling is reached, is still a key consideration. The process going forward does have a time limit and if a deal is not achievable, passing a clean extension remains a viable alternative.

That said, it is also important to note that the Senate Democratic Majority could not pass a clean debt ceiling extension on its own. As much as their leadership professed a desire for a clean extension, they took no action to vote on one. The reality is that if the Senate had tried to move before the House acted, it would have failed as both Republicans and at least a few Democrats would have blocked them. In other words, the Senate was “stuck” with two choices: 1) take up a clean extension bill only after House Republicans failed to pass something and had no other options, or 2) following House passage, begin negotiations on an extension that would contain some number of budget cuts and/or program changes. There are Senate Democrats who want to avoid a clean extension and supported negotiations.

Notwithstanding President Biden’s veto threat and the Leader Schumer’s outright rejection of the House bill, the way forward appears limited. As such, a complicated negotiation is about to start and the direction forward becomes very, very difficult to chart.

• The first complicating factor is the number of groups now sitting at the negotiating table: Where only House Republicans were involved before, going forward, House Republicans are joined by the Biden Administration, Senate Democrats, House Democrats and Senate Republicans.

• The second complicating factor is that with a clean extension off the table, the door opens for whatever package of changes that can gather a majority in both houses. The number of combinations of budget and program changes is almost limitless. In order to meet the “X” date, however, negotiations need to begin immediately and all of the participants, including the Biden Administration, who seemed to bet against the possibility the House could pass a bill and did not seem to prepare for this situation, must reevaluate their position and approach to the process.

Key unresolved questions and bottom line:

1.     Do the Senate Democrats go through the process of passing their own version of debt ceiling increase?  Do they have the votes to pass a debt ceiling increase?

2.     Does President Biden tell all Democrats to ignore the House bill and try to “wait it out?”

3.     Does President Biden tell his team to take the lead in negotiations and cut a deal with House Republicans that all Democrats are directed to support?

4.     Does Speaker McCarthy have the ability to negotiate a bill that a large number of Republicans will not support, relying on some Democratic votes to pass a final bill? (The current bill passed 217-215).

We will follow-up on these questions as they are addressed, but we want to reiterate the opening message: This was a huge win for House Republicans and Speaker McCarthy but it also opened the entire process up and brought in an element of chaos. Getting a bill completed gives them something to use in negotiations, but will they find negotiating partners? The Biden Administration was against passing anything but a clean extension and seems to have bet against the House getting to this point. The Senate Democrats say this bill is “dead on arrival” yet have no bill of their own and may not have the ability to produce a bill at any point in the near future. This latest development is the first step in starting the negotiation process, not the end. 

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