U.S. Congress has a budget deal, but more uncertainty lies ahead

Murray Ryan

Despite the successful Ryan-Murray budgetary agreement, another U.S. Debt Ceiling Debate Looms on the Horizon.

A compromise brokered by Republican Representative Paul Ryan and Democratic Senator Patty Murray is poised to become law, setting federal spending for 2014 and 2015. Not only did this deal avoid eleventh-hour theatrics, but it also is more substantial than the temporary budget extensions Congress has produced since 2010.

The deal looks like an end-of-year gift for almost everybody in Washington, with the notable exception of the Tea Party, especially when considering that it finds some clever spending cuts and reverses some of the worst parts of the sequestration. Federal Reserve Chairman Ben Bernanke even publicly welcomed the deal, saying that it was a factor in choosing to begin the Fed taper now.

Some commentators and politicians are hailing the Ryan-Murray deal as a breakthrough for this Congress, which it certainly is, but there are still two big budget battles on the horizon – and neither of them looks like it will be as easy as this one.

How much to spend, but not how to spend it

Because nothing in Congress ever seems to be easy, the Ryan-Murray budget bill does not mean the budget process is done. The House and Senate Appropriations Committees still have to hammer out the details of how the money is spent. The deal does offer a small amount of detail about certain programs (like the sequestration), but is otherwise unspecific.

The Ryan-Murray budget bill did not find a compromise on the biggest funding issues, such as infrastructure spending, unemployment insurance, or the Affordable Care Act. These have to be handled by the Appropriations committees.

As an indication of how far apart the two committees are already, one only needs to look at their proposed budgets for the Environmental Protection Agency (EPA): the Democratic Senate earmarks $8.5 billion for it, while the Republican House funds it 30 percent less. This is just one politically contentious agency out of dozens, and all of them will have to be agreed upon by the two bodies.                                                                 

The debt ceiling debate – again

For all the optimism about future compromise coming from this deal, many conservative groups are livid at the Republicans’ inability to extract more spending cuts from the deal. Senate Minority Leader Mitch McConnell (R-KY) – who is challenged for the Republican nomination for the 2014 election by a Tea Party favorite – has voiced similar sentiments.

McConnell, conservative groups and many other Republicans are now targeting the upcoming debt ceiling limit as an opportunity to extract budget cuts and push through the Keystone XL pipeline. This sets up a debate just like the previous four debt ceiling debates, where Republicans attach contentious conditions to their vote to raise the debt ceiling, even though the debt ceiling only authorizes the Treasury Department to borrow the amounts already approved by Congress.

Just like the last four times this debate occurred, it has the potential to be tumultuous for markets (just look at what happened in October to the secondary market rates for Treasury Bills that matured the day the debt ceiling was set to expire).

The federal government will hit the debt ceiling on February 7, 2014, but Treasury Secretary Jack Lew anticipates that ‘extraordinary measures’ will allow his department to keep paying the bills until late February or early March. If the debt ceiling is not raised by then, the ensuing chaos will have a serious impact on the world economy’s growth prospects. The OECD lists the U.S. debt ceiling as a larger risk to the world economy than Europe’s slow growth.

Nobody knows for sure what will happen if the debt ceiling is not raised, especially if for a substantial period, but those who understand the issue know it will not be good. A full default on U.S. debt is unlikely, but some checks from the Treasury could bounce. If those checks are paychecks or Social Security checks, then consumer spending and GDP growth will take a hit. Even before breaching the debt ceiling, Treasury Bonds could start to seem more risky. Rates could rise, but more importantly, the confidence in Treasury bonds, which have been seen as a safe asset during the recession, would be shaken.

Stalemate in negotiations

Whether the markets find out if the debt-ceiling doomsday scenarios come true depends on how successful the two parties are in negotiations. At the moment there appears to be a stalemate. President Obama and the Democrats are standing firm that they will only vote for an unconditional increase to the debt ceiling, a threat they credibly carried out in October. Republicans will have to balance their two increasingly hostile camps: the Tea Party, which has no qualms about paralyzing the federal government, and the establishment, which typically is more willing to negotiate with the Democrats.

The way the debate is shaping up in the aftermath of the Ryan-Murray budget deal, the negotiations will center on the Keystone XL pipeline, which elicits strong responses from the bases of both parties. With President Obama’s approval of the pipeline contingent on upcoming emissions test results, the debt ceiling debate could be put off until the very last minute – again.

Advertisements

Tags: , , , , , , , , , , , , ,

Categories: North America, Politics

Author:Alex Christensen

Alex Christensen focuses on the impact policymaking has on the economy. He previously was an economic policy analyst at Minnesota 2020, a non-partisan think tank based in St. Paul, Minnesota. As the Hirsch Undergraduate Fellow at the Center for New Institutional Social Sciences, he analyzed how political institutions impact the development of wind power across the OECD countries. Alex is currently studying for his MSc in Economics at the London School of Economics, where his thesis examines the connection between monetary policy and equity prices. Previously, he graduated magna cum laude from Washington University in St. Louis with a degree in economics and political science.

Connect

Subscribe to our RSS feed and social profiles to receive updates.

Trackbacks/Pingbacks

  1. Expiration of jobless benefits poses growth risk to US economy | Global Risk Insights - January 7, 2014

    […] find work for more than six months in a depressed job market – was a Democratic priority in the recent budget negotiations, but was eventually left out due to a Republican […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: