The Washington brief: Wrapping up the debt ceiling drama

What happened

• This week the House passed the Fiscal Responsibility Act, which effectively suspends the debt ceiling until after the current presidential election cycle (Jan. 1, 2025).
• The bi-partisan vote (314-117) had the support of Speaker McCarthy, President Biden and most rank-and-file Republicans and Democrats. While the Senate will take additional days to vote on the bill, clearing the House puts it on a glide path to becoming law.
• Among its major provisions, the bill puts a two-year cap on non-defense discretionary spending (fiscal years 2024 and 2025) and rescinds $30 billion of unspent coronavirus relief funding. Another $20 billion of previously allocated IRS funding will be moved to other non-defense funds while work requirements for SNAP/TANF governmental assistance programs will be enhanced. The bill also effectively ends the current pause on student loan debt repayment.

Our take

We view the House passage of this bill positively, as it effectively takes the threat of a debt default off the table. We also view the legislation as potentially encouraging for future compromises in the upcoming appropriations negotiations. That said, the reduced spending and restarting student loan payments will be a modest negative economically.

Perhaps the most important feature of the bill is the way it deals with appropriations over the next two years. Prior to the deal, we had assumed the debt ceiling fight would be followed by a rancorous appropriations process where, because of the massive disparity in their priorities, the House and Senate would be unable to pass bills. The debt deal legislation anticipates this issue and addresses it with a mechanism that will very likely drive compromises leading to passage of the 12 bills in fiscal years ’24 and ’25. 

Under the proposal, if any one of the appropriations bills doesn’t pass, then all 12 of the bills would be subject to a funding formula where discretionary spending will operate at 99% of current fiscal year (FY’23) levels. While this sounds like a uniform haircut, this would reduce defense spending and non-defense spending would increase. This provision will put pressure on House Republicans to pass all 12 appropriations bills to protect the defense spending increases that are included in the deal on a going forward basis. “Regular order” appropriations will, in the end, increase the predictability of government spending for the two-year period covered under the bill.

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