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Expect a ‘prolonged fight’ over spending caps

Deal might not be reached until it’s too late to get next year’s spending bills done in time

Rep. John Yarmuth, D-Kentucky., leaves a House Democrats' caucus meeting in the Capitol in January. (Bill Clark/CQ Roll Call file photo)
Rep. John Yarmuth, D-Kentucky., leaves a House Democrats' caucus meeting in the Capitol in January. (Bill Clark/CQ Roll Call file photo)

Lawmakers return to Washington this week looking for quick movement on another two-year budget deal to waive austere spending caps and lay the foundation for an orderly fiscal 2020 appropriations process.

There’s little reason to believe a “caps deal” can be achieved quickly, however. In fact an agreement may not be reached until late in the year, some observers say, when it’s too late to get next year’s spending bills done in time for the start of the new budget year Oct. 1.

“I do think this is going to be a prolonged fight,” said Romina Boccia, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation.

The reasons are both logistical and political.

Deadlines? What deadlines?

First, there’s no hard deadline for enactment of a spending agreement until 15 days after the end of this year’s congressional session. That’s when, under the 2011 deficit reduction law that established the stringent caps snapping back into place for the next two fiscal years, the automatic across-the-board cuts known as a “sequester” would kick in.

The end of the fiscal year, Sept. 30, when Congress has to pass something to avoid a partial government shutdown, also provides a backstop. But lawmakers can always punt a final resolution on spending levels down the road with a stopgap funding measure.

Second, the statutory debt ceiling, which snaps back into effect at just north of $22 trillion on March 2, provides an obvious legislative vehicle for Congress to cut a deal with President Donald Trump on spending levels for defense and nondefense programs that both sides can call a “win.”

That’s been the formula under divided government the last two times a spending deal alleviating sequester-level caps has been enacted, in 2015  and 2018. And House Democrats say that’s likely to be their preferred approach this year as well, with one senior aide telling CQ Roll Call “we hope to do the debt ceiling with a caps deal.”

Without raising or suspending the debt ceiling, bad things would happen. The Treasury Department would have to operate on daily incoming cash flow, deciding whether to pay bondholders or Social Security recipients, for example. Investors around the world would view the U.S. as a shaky place to park their assets.

So the debt ceiling has become the go-to leverage point in recent years to get a lot of things done, including, in the 2018 iteration, a suite of tax break renewals. With this year’s tax filing season in full bloom, lawmakers such as Senate Finance Chairman Charles E. Grassley, R-Iowa, are itching to again renew the expired tax “extenders,” for interests ranging from biodiesel producers to homeowners underwater on their home values.

But in 2015 and 2018, Treasury was staring down the barrel of default just as Congress was getting in gear. In 2015, the Senate cleared the debt ceiling and cap increase measure on October 30; Treasury had said they’d be unable to pay obligations in full as soon as Nov. 3. In 2018, Treasury estimated they’d run out of cash at the end of February; the House cleared that year’s package on Feb. 9.

This year? Independent forecasters are mostly in agreement that Treasury can use “extraordinary measures,” such as forgoing new investments of federal worker retirement savings plans, to avoid hitting the debt ceiling before late summer or early fall.

With the fiscal year deadline looming at the end of September, it’s easy to see how lawmakers might end up postponing decisions both on spending caps and the debt limit until after Labor Day. And there’s always a temporary debt limit measure and continuing appropriations resolution to buy some extra time if needed.

Misaligned incentives

For fiscal 2019 and 2020, Democrats won a form of rough “parity” for defense and nondefense spending: equal increases above the stringent sequester-level caps. Now in control of the House, Democrats are starting to think they should go bigger on nondefense funding.

“In light of the budget agreement we had 18 months ago, it would be pretty crazy for Republicans to think they could end up with a better deal from their perspective,” House Budget Chairman John Yarmuth, D-Kentucky, said before last week’s recess. “And it would be stupid for us to think we can’t get, now that we’re in the majority, at least as good a deal as that.”

As a political matter, Trump has little reason to sign such a deal into law without some substantial sweetener attached, like money for his border wall. Paul Winfree, a former Trump domestic policy aide, said the president will not want to give Democrats a “big win or open himself up to attack from the right flank.”

And like every administration, this White House has pushed a “clean” debt limit suspension to avoid rattling financial markets; though as noted earlier that deadline is likely pushed back as far as six months from the beginning of March.

“It would not surprise me at all if Dem leaders try to jam folks by combining the debt limit with a [caps] deal. …It works for them politically,” said Winfree, who is now director of the Roe Institute for Economic Policy Studies at the Heritage Foundation. Winfree said the “White House is anticipating this and will start more strongly messaging their position on the caps in the next week or so.”

Trump certainly wants military spending that can’t be achieved under the regular spending caps, which are scheduled to drop from $647 billion this year to $576 billion in fiscal 2020. But in a stark turnabout from past budget proposals, Trump is expected to submit a budget next month that keeps spending at or below sequester levels for both defense and nondefense programs, or a 10 percent drop from this year’s appropriations.

But there’s a twist: according to a person familiar with the discussions, Trump will propose adding $174 billion in war-related funding allowed outside the caps, for a total of $750 billion. By comparison, the total fiscal 2019 defense allotment is $716 billion.

Lawmakers are almost certain to resist such a proposal, but it would be designed to make GOP military hawks on Capitol Hill happy while driving Democrats crazy over steep cuts in domestic and foreign aid programs. And in the process, it would likely stifle hopes for “regular order” consideration of appropriations bills the new House Democratic majority is aiming for.

A trillion here, a trillion there…

Another factor that could give deficit hawks pause: under budget scorekeeping rules, the Congressional Budget Office will estimate that a two-year caps increase would add $2 trillion to annual deficits over a decade. That’s because the CBO would assume the higher spending levels in fiscal 2020 and 2021 continue to rise with inflation rather than falling again to lower cap levels as in past estimates. The discretionary caps expire after 2021.

Additionally, the battle between Trump and Democrats over wall funding, which led to a 35-day partial government shutdown, could continue to play out in caps negotiations if Trump makes wall funding an issue.

If a caps deal remains elusive, House Democratic leaders have the option of using their new supercharged “Gephardt rule” to automatically spin off a clean debt limit suspension through Sept. 30, 2020, upon adoption of a fiscal 2020 budget resolution.

But Yarmuth says adopting a budget may be tough this year as his party can only afford 17 defections on the floor; and even if they do, the debt limit measure would be open to amendment in the Senate. With a half-dozen Democratic presidential aspirants in that chamber combined with GOP conservatives who never like to vote for spending and debt limit increases, the temptation to demand concessions in exchange for votes may prove irresistible.

“It tends to be the folks that are further toward the extremes of both parties that look for opportunities to put their issues in the spotlight,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center.