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Washington was stunned when President Donald Trump agreed to a bipartisan deal that couples more than $15 billion in emergency federal aid for victims of Hurricanes Harvey and Irma with three-month extensions of government funding and the debt ceiling.
If finalized by Congress, the agreement will abruptly—but only temporarily—solve the three most pressing issues on the Congressional calendar, issues that were expected to be the focus of bitter battles in the House and Senate right up to the end of September. It also sets up what is sure to be a titanic battle in Congress in December when the three-month agreement expires and lawmakers will again be forced to confront a government shutdown and a potential first-ever default.
The Senate approved the package on Sept. 7. House leaders were optimistic the package would clear that chamber and go to the president for his signature by this weekend. Under the agreement, government funding, which was set to lapse on Sept. 30, will be extended through Dec. 8.
The debt ceiling, which Treasury Secretary Steven Mnuchin had said needed to be raised by Sept. 29 to avoid a default, will be suspended until Dec. 8. The Treasury Department will be able to use “extraordinary measures”—such as suspending the issuance of state and local securities and changing the way federal retirement funds are invested—to ensure the United States does not default on its debts for a short time after that date. The exact date a potential default could occur isn’t totally clear, but it is thought the Treasury would have enough cash to pay its bills until sometime in early 2018.
The market has generally reacted positively to news of the agreement. Yields on Treasury bills maturing in mid-October, which had previously spiked because of default concerns, have declined 15-25 basis points since the announcement, bringing them back to normal levels. Market watchers are now keeping their eyes on yields for T-bills maturing in early 2018, the next potential default window.
Deal surprises Republicans and complicates December
The deal was forged during a White House meeting between Trump and Congressional leaders from both parties on Sept. 6. Republicans had pushed for a much longer debt ceiling agreement, with Mnuchin proposing an 18-month fix that would have taken the issue off the table until after the 2018 mid-term elections.
Democrats, represented by Senate Minority Leader Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Cal.), countered with the three-month option, which the president quickly accepted. Republicans were astonished, as they had hoped to use the urgent need for hurricane relief to extract a longer-term agreement from Democrats.
But Trump wanted to avoid a “food fight” that could delay the hurricane relief, according to House Speaker Paul Ryan (R-Wis.). After the deal was announced, angry Republicans on Capitol Hill seemed resigned to passing a bill, but were also expressing frustration over the outcome. In the House, a large group of conservatives quickly penned a letter to Ryan announcing their intention to oppose the short-term solution.
Those feelings are likely to complicate what is shaping up to be a very difficult showdown in December. Last month, Trump said he would consider shutting down the government if Congress didn’t include funding for his proposed southern border wall in the agreement to keep the government operating. He backed off that threat in the wake of the twin hurricanes.
It’s likely the president will renew the call for border wall funding in the December debate, raising the odds of a government shutdown.
And the debt ceiling fight is always a complicated one on Capitol Hill. Many conservatives have consistently opposed any measure that would allow the country to accumulate more debt, while others have argued that an increase in the debt ceiling should be paired with an equivalent amount of spending cuts. In recent years, it has taken a coalition of moderate Republicans and Democrats to deal with the debt ceiling. With mid-term elections looming next year and Democrats optimistic about their chances to retake control of one or both chambers of Congress, they will have little incentive to help Republicans with the debt ceiling in December.
Window open for tax reform this fall?
With what was expected to be a very busy September calendar for Congress suddenly wiped clean, speculation has grown about whether Congress can turn to tax reform more quickly than previously expected.
However, our take is that the latest agreement only underscores that the chances of any tax bill getting approved before the end of 2017 are very low.
At the moment, no tax bill has been unveiled by Republican leaders and a complete draft doesn’t appear to be close to ready yet. The so-called “Big Six” negotiators—a group comprising key White House officials and Republican Congressional leaders—have been meeting for months and have only a statement of broad principles to show for their efforts. Most observers believe a bill won’t even be introduced before late September or early October. That would mean the Congressional committees that will have to work out the nuts and bolts of tax reform won’t be able to take advantage of all the free time they now have in the early part of September to start work on what will undoubtedly be an enormously complicated piece of legislation.
Moreover, December is now suddenly jam-packed with the complex, time-consuming debate that was expected to happen this month. It is hard to imagine Congress dealing with those issues and a major tax reform bill at the same time.
As a result, we continue to believe that tax reform won’t get resolved until the first part of 2018.
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