Search
  • Allon Advocacy

The Fiscal Cliff Just Got Taller


The political dynamic between the Democratic House and the Trump administration makes a deal to avert financial catastrophe this fall harder to reach.

It’s become something of a running joke in Washington to wish one’s friends a happy infrastructure week. That’s because, according to the Washington Post, since President Trump took office in January 2017, the administration has declared no less than seven infrastructure weeks – weeks in which the administration and Congress would singularly focus on legislation to revamp America’s aging roads, tunnels and bridges – and each of them has been derailed by political kerfuffles. This week was supposed to mark the eighth attempt at infrastructure week in Washington and it, too, derailed this morning. But the joke may not be funny much longer.


A White House meeting among President Trump and Congressional leaders meant to focus on infrastructure lasted less than five minutes today. The meeting, which convened just moments after House Speaker Nancy Pelosi (D-Calif.) publicly alleged that the president is “engaged in a cover up,” ended when President Trump declared that he could not work with Democrats on legislative priorities until Democrats ceased all of the House’s ongoing investigations into his 2016 campaign and administration.


That declaration could have potentially dire implications for the economy.


By the end of September, Congress and the White House will need to negotiate a deal (or deals) to raise the debt ceiling and set future federal discretionary spending levels. In a town known for leaving minor and major issues until the last minute, it is telling that negotiations on these two matters had already started in earnest earlier this week. But based on today’s White House powwow, it’s not clear that those conversations will be able to continue seriously.


Before getting to that, here is where we are today.


As the Committee for a Responsible Federal Budget explains, the nation’s federal debt limit – a limit that caps the amount of debt the United States can incur and that, since passage of the Second Liberty Bond Act of 1917, has been set by Congress – was suspended last year with the Bipartisan Budget Act of 2018. Because the United States government operates on a continual deficit, the Treasury Department must issue debt in order to meet the government’s obligations, including Social Security and Medicare payments, payroll of civilian and military employees, and scores of other government-funded programs and services.


That suspension actually expired this past March, but currently, and over the coming months, the U.S. Department of the Treasury is using “extraordinary measures” to avoid breaching the ceiling. These measures include withholding regularly scheduled contributions to federal employee retirement funds. (Treasury will make up those contributions, theoretically, once Congress and the White House figure out a path forward on the debt limit.)


These extraordinary measures will hold until September, or possibly even October. If members of Congress and the White House cannot agree to legislation before then to raise the debt ceiling, the consequences would be devastating. As The Balance explains, a breach would mean the Treasury Department cannot issue new auction notes and “must rely on incoming revenue to pay ongoing federal government expenses.” (See 1996, when the debt ceiling was breached and the Treasury Department said it could not make Social Security payments.)


Under the current web federal regulations, it’s not clear what programs get funded first. In other words: chaos.


Additionally, foreign owners of our debt, like the Chinese and Japanese governments, could get concerned that they might not get paid. In a default scenario, The Balance says several things would happen:

  • Federal employees would be furloughed and pension payments would cease.

  • Social Security, Medicare, and Medicaid beneficiaries would stop receiving checks.

  • Federal buildings would close and services would stop.

  • The yields of Treasury notes sold on the secondary market would rise, leading to higher interest rates.

  • Owners of U.S. Treasuries could dump their holdings, causing the dollar “to plummet” and possibly eliminating “its status as the world's reserve currency.”

As if those consequences are not devastating enough, at the same time they are dealing with the debt ceiling, lawmakers also must negotiate a new budget deal to govern fiscal year 2020 (and future) spending.


As readers will recall, eight years ago Congress passed, and President Barack Obama signed, the Budget Control Act (BCA) of 2011. The BCA established caps on the amount of money that could be spent through the annual appropriations process for the next 10 years. According to the Congressional Research Service and the Congressional Budget Office (CBO), the caps would have reduced federal spending by $917 billion.


Why “would have”? Because members of Congress acted in subsequent years to lift the caps. They’ve never taken effect. In addition to suspending the debt ceiling, the 2018 Bipartisan Budget Act (BBA) circumvented the required government spending caps for fiscal years 2018 and 2019. (In case you’re wondering, the U.S. government will spend approximately $4.6 trillion this year. In 2011, when the BCA was enacted, total government spending was a meager $3.7 trillion.)


The BBA said nothing about fiscal year 2020 and beyond, so Congress now must pass a new piece of legislation or the BCA caps will automatically take effect.


If Congress and the White House cannot agree to a new budget deal, BCA-level caps will return for fiscal years 2020 and 2021, resulting in a $126 billion cut in federal discretionary spending programs in fiscal year 2020 alone. (Discretionary spending programs make up nearly 50 percent of the federal budget and provide funding for everything from the Department of Defense to the Department of Education, to national parks.)


White House officials and Congressional Democrats met on Tuesday to begin negotiations on a budget deal. Not surprisingly, Politico reported yesterday’s meeting ended “with no resolution but a commitment to keep negotiating and try to clinch a debt and spending agreement that would avoid fiscal catastrophe.” As House Minority Leader Kevin McCarthy (R-Calif.) explained, “Deals like this take time.” That was before President Trump issued his moratorium on working with Congress on legislative priorities this morning.


Further complicating the political dynamic is this reality: there are fiscal hawks on Capitol Hill who, as a matter of policy, want to see the automatic budget cuts implemented. This week more than 40 members of the U.S. House, including Rep. Justin Amash (R-Mich.), who became the first sitting Republican member of Congress to support impeachment proceedings against the president, wrote to the commander in chief urging him not to negotiate with Democrats and hold to the BCA budget caps.


It’s going to be a long summer.

4 views

Contact Us

1441 L Street, NW

12th Floor

Washington, DC 20005

(202) 876-2995

© 2019 by Allon Advocacy, LLC.

  • @AllonAdvocacy
  • Allon Advocacy, LLC
  • LinkedIn Social Icon