Debt Ceiling Negotiations:status and outlook

May 19, 2023

The late Senator Everett Dirksen (R-IL) reportedly summed up the dimension of 1950s Congressional budget negotiations by stating, “A billion here, a billion there, pretty soon you’re talking real money.” By 1960, those billions had led to a U.S. debt ceiling limit of $293 billion. Since then, the debt ceiling has been raised 78 times, reaching its current level of $31.4 trillion. However, as our government is spending almost $4 for every $3 it receives in taxes and other payments, it appears necessary to raise the debt ceiling again just to pay for past Congressional appropriations—not to mention future ones.

In this report, The Mather Group, LLC (TMG) reviews the status of and outlook for ongoing negotiations between the White House and the Speaker of the House of Representatives to raise the debt limit. As shown in the graphic below, the growth in total public debt has accelerated during the last 10 years, rising by 91%. As a share of our gross domestic product (GDP), total public debt has grown from 100% to 120% during this period. In comparison, Germany’s debt-to-GDP ratio is 67%, and China’s is 77%.

However, the negotiators are not trying to reach agreement solely on a new debt limit ceiling. Instead, these debates are intertwined with a multitude of short- and long-term budgetary issues that pit proposed increased spending and tax initiatives against significant budget caps and numerous expense reductions.

This report examines the different objectives of both parties in the negotiations. The major areas of discussion include budgetary spending caps; work requirements for recipients of federal health and nutrition programs; personal and corporate income tax levels; disposition of unspent COVID stimulus funds; and permitting reform for both fossil fuel and clean energy infrastructure projects.

Background

The debt ceiling simply limits the amount of debt issued by the U.S. Treasury to fund existing federal programs. It is not an appropriations bill intended to support future spending. The current limit of $31.4 trillion was reached in January 2023, so the Treasury has resorted to “extraordinary measures” in the interim to fund existing programs. However, with only $88 billion left in this funding pool, it is expected that the “X-date,” or the date on which the Treasury will exhaust its funding capacity, will occur on or about June 1.

It had been thought that this X-date would occur later in the summer, but an unexpected shortfall in April tax receipts hastened its onset. More specifically, April 2023 tax receipts were $640 billion, down 26% from April 2022 levels, and $250 billion less than Treasury projections made in January. The next large influx of tax receipts will not occur until June 15, diminishing any confidence that the Treasury shortfall could go beyond June 1.

The negotiating stance of both parties differs significantly. The White House wants a “clean” debt ceiling increase, unlinked to any budgetary discussions. It is willing to have a separate set of discussions about future budgeting issues, but it wants them tied instead to its FY 2024 budget. Thus, the White House wants a debt ceiling increase to be finalized and implemented before such budgetary discussions begin.

In contrast, the House passed its own FY 2024 budget, and it wishes to achieve a reconciliation of its and the White House’s budgets as an integral element of any debt ceiling increase. The House leadership believes that its leverage over future spending levels could diminish greatly if it accepted a “clean” debt ceiling increase instead.

Apparently, because of recent meetings, both sides now recognize that the chances of a “clean” increase are diminishing daily. Instead, the White House appears willing to include some level of budget negotiation within its debt ceiling discussions.

Budgetary Spending Caps

The FY 2024 White House budget totals $6.9 trillion. It is comprised of both mandatory and discretionary programs. Mandatory programs—totaling about 63% of the total federal budget—include Social Security and Medicare, as well as other programs mandated by prior laws. Discretionary programs represent most of the remaining federal budget, and each program within it must be approved in the Congressional appropriations process each year. The remainder of the budget is interest payments on the federal debt.

The White House FY 2024 budget includes $1.9 trillion of discretionary spending, a 9.4% increase over FY 2023 levels. Over the next 10 years, discretionary spending is projected to increase annually by 1%. This alone—not including proposed personal and corporate income tax increases that could occur during this period—would drive the federal deficit up by another $2.23 trillion. It is important to note that these spending and deficit projections have not been reviewed and confirmed by the Congressional Budget Office (CBO), an independent, non-partisan federal agency within the legislative branch of government.

The House passed its FY 2024 budget, labeled the “Limit, Save, and Grow Act” (LSGA). It would reduce FY 2024 discretionary spending back to FY 2022 levels, achieving a 4.7% reduction from the FY 2023 amount of $1.74 trillion. In this scenario, discretionary spending is also projected to rise by only 1% during each of the next 10 years; however, this budget projects an overall $4.8 trillion reduction in the deficit during this period. The spending and deficit projections within this budget have been reviewed and confirmed by the CBO.

Obviously, there is a significant gulf between these two budgets, and the resolution of these differences, if it occurs, will be a major negotiating point during the next two weeks.

Work Requirements

Beginning in 1996, the government imposed work requirements for healthy adults who wanted to participate in several federal assistance payment programs. As an example, federal requirements for food stamps mandated that able-bodied, childless adults between ages 18-49 could only receive benefits for three months out of every three years unless they worked at least 20 hours a week during this period. Individual states were allowed to impose further—but not reduced—requirements. During the multi-year COVID pandemic, these requirements were suspended, but they were restored when the pandemic emergency expired on May 11.

While no requirements have ever existed for Medicaid recipients, the LSGA imposes them for the first time and also expands the work requirements for food stamp recipients. More specifically, the top of the age range rises to 55 from 49. As a result, the CBO projects that 275,000 recipients will no longer be eligible for food stamps, and 600,000 will lose Medicaid coverage.

Personal and Corporate Income Tax Levels

The White House FY 2024 budget proposes the following tax increases, among others:

Raise corporate income tax from 21% to 28%.
Raise stock buyback tax from 1% to 4%.
Raise personal income tax from 37% to 39.6%.
Impose “billionaires” tax of 25% on wealthiest 0.01% of taxpayers to tax unrealized capital gains.
Increase Medicare premiums for household incomes above $400,000.
Eliminate various fossil fuel and digital currency tax breaks.

These and other tax increases, if enacted, are expected to help reduce the projected $2.23 trillion deficit resulting from the White House’s FY 2024 budget.

The LSGA for FY 2024 proposes a set of significant tax policy changes as well, including:

Repeal the student debt cancellation and income-driven student loan repayment plans. (The student debt cancellation program will be ruled on by the Supreme Court shortly, so this proposed policy change may be moot.)
Repeal the clean energy tax credits and spending initiatives contained in the Inflation Reduction Act.
Repeal $80 billion of IRS funding also contained in the Inflation Reduction Act.

Tax policies are expected to be a very contentious element of the debt ceiling negotiations.

Unspent COVID Funds

Although estimates of unspent COVID funds vary from $50-$70 billion, there appears to be growing sentiment between the negotiators that some or all these funds should be clawed back. If so, it could give the House a confirming sign that the debt ceiling and the budget negotiations are indeed linked. For the White House, it could be an important, but financially inconsequential, sign of bipartisan compromise.

Infrastructure Permitting Reform

When Senator Joseph Manchin (D-WV) agreed to be the deciding vote for passage of the Inflation Reduction Act, he did so in return for an unwritten promise that his proposed legislation to fast-track fossil fuel infrastructure projects would receive Senate debate and a final vote. It never happened due to pressure on Congressional members from environmental activists.

In response, the House Energy and Commerce Committee and the Senate Energy and Natural Resources Committee have offered a broad package of proposed energy-related legislation to be included as part of the debt ceiling negotiations. It offers rule changes for the nuclear, hydropower, and natural gas and oil sectors. Focusing on the natural gas and oil sectors only, several of the House Energy and Commerce Committee proposed rules include:

“Remove regulatory barriers to the permitting of cross-border pipelines and electricity transmission.
Authorize the construction and operation of the Keystone XL pipeline.
Prohibit bans on hydraulic fracturing to preserve America’s energy independence and national security.
Streamline the natural gas pipeline permitting process at the Federal Energy Regulatory Commission.
Prohibit the Secretary of Energy from tapping the Strategic Petroleum Reserve for non-emergency reasons until establishing a plan to increase oil and gas production on federal lands and waters.”

While environmental resistance to this and other energy infrastructure legislation may not diminish, John Podesta, the White House Chief Climate Advisor, stated this week that the White House supports the legislation offered earlier by Senator Manchin. Such a response could be a “win-win” for both negotiating teams, lending more credence to the fact that bipartisan compromise has occurred.

TMG continues to employ its risk management tools in response to potential debt ceiling market volatility, and clients who continue to adhere to their financial plan maintain the strongest pathway through this potentially volatile period. Your trusted advisor at TMG is ready to respond to any questions or concerns you might have, and to help ensure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.

Sources: Bloomberg; Bureau of Economic Analysis; Bureau of Labor Statistics; Congressional Budget Office; Dirksen Congressional Center; Energy Information Administration; Federal Reserve Bank of St. Louis; Federal Reserve Board; Goldman Sachs; Morgan Stanley; Office of Management and Budget; Reuters; The White House; US Government Publishing Office; US Treasury; Wall Street Journal

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