The Big Idea
Quick Fiscal Update
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The negotiations in Congress over the stopgap budget bill are creating headlines this week. Here is a quick summary of what is happening.
The federal government’s current fiscal year started on October 1. Congress passed a stopgap budget at the end of September that kept spending at FY2024 levels for three months and kicked the can to December 20. Here we are, approaching another expiration date. The next stopgap bill is going to be the last act of the 118th Congress, and legislators are piling on to get their favorite spending initiatives included.
Remember the political context: until January 3, when the new Congress is seated, Democrats control the White House and the Senate, while Speaker Johnson and the House Republicans hold a slight majority in the House. Johnson claimed that he did his best, but Democrats demanded a litany of spending items. The package that he rolled out kicked the can again on the 2025 budget, extended the continuing resolution by another three months to March 14, leaving it to the new Congress to pass a final budget. However, to agree to that, negotiators demanded over $100 billion worth of new spending designated as emergency and thus not subject to aggregate budget caps.
I am not arguing the merits of the provisions. $30 billion reflects money for FEMA after the hurricanes and other natural disasters wreaked havoc during the summer and fall. $10 billion is earmarked to farm aid. I am sure that a good case can be (and has been) made for each of the line items. But the sum total of the package screams business as usual in Washington at a time when budget deficits are clearly unsustainable. No offsets for the new spending (was it not foreseeable that we would have natural disasters in 2024?), no effort to prioritize. This is the mode that has produced $2 trillion (and growing) annual federal government budget deficits. Slipping a major spending increase in under the wire days before Christmas has become a nearly annual tradition in Congress, so one can understand the frustration of fiscal hawks that it was in the process of happening yet again.
Enter the incoming Administration. Elon Musk weighed in heavily yesterday in opposition of the bill: “this bill should not pass.” Not long after, President-elect Trump posted his opposition on social media: “We should pass a streamlined spending bill…WITHOUT DEMOCRATIC GIVEAWAYS.” Speaker Johnson pulled his support for the bill, and now negotiators are discussing how to pass a “clean” Continuing Resolution (CR), that is, one without additional provisions. Of course, the problem now is that the government will shut down this weekend without an agreement, so time is running short. And Democratic leaders want to stick with the old deal.
Seems like Christmas break will be coming late this year for Congress. I would anticipate that Congress may pass a bill by tomorrow that keeps the lights on for a few extra days and then reach some sort of stripped-down interim agreement over the next several days so that lawmakers can vote and go home for the Holidays, perhaps early next week.
President-elect Trump threw another monkey wrench into the picture yesterday when he argued that this stopgap bill should also include a debt limit extension. Financial market participants, Treasury debt managers, and the Fed would undoubtedly be happy to be rid of that headache early, but legislators were blindsided, as the plan had been to allow the debt ceiling waiver to expire as scheduled in January and to have Treasury manage the situation in early 2025 with extraordinary measures. It is understandable that President-elect Trump would want this problem to be addressed before he takes office. Hard to blame him there! Whether it gets done at the 11th hour remains to be seen.
Trump actually went a step further, suggesting that he would support eliminating the debt limit permanently. We will see whether this idea gains traction next year, but I am quite sure that financial market participants would enthusiastically get behind this initiative! Traditionally, Congressional Republicans have used debt limit deadlines as one of their few points of leverage when Democrats hold the White House to press for fiscal restraint. So, I would imagine that a lot of Democrats would actually line up with Trump on this one, so the question is whether Republicans get behind Trump (who presumably cares much less what happens with fiscal policy in some future Democratic Administration than many Republicans lawmakers would) for expediency or play the long game.
The other potentially lasting fallout from this week’s drama is that Speaker Johnson’s leadership is once again being called into question. A handful of hardline conservatives are calling for him to step down as Speaker due to his perceived complicity with Democratic spending proposals. As noted above, the new Congress will be sworn in on January 3, and the House will vote on a speaker at that time. With a razor-thin majority again, Republicans may struggle to unite behind Johnson (or any other Speaker candidate for that matter). If the opposition to Johnson gathers steam, I would imagine that President Trump will be the ultimate decider of who leads the House in 2025.
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