Enormous Challenge For Congress Before Fiscal Yearend
FORECASTS & TRENDS E-LETTER
1. Government Funding – A Federal Budget For Fiscal 2018
2. President Trump’s Border Wall & Government Shutdown
3. Lawmakers Must Increase the Debt Ceiling Just Ahead
4. Chaos if Congress Doesn’t Raise the Debt Ceiling
5. Children’s Health Insurance Program Set to Expire
6. National Flood Insurance & FAA Funding to Expire
Both houses of Congress return to Washington after Labor Day, following a ridiculous month-long recess, and members will be facing a boatload of “must-pass” legislation. First, lawmakers face a September 30 deadline to pass a new federal spending budget for the next fiscal year to avoid a government shutdown.
Then, they'll have to grapple with raising the debt ceiling and preventing a default on the nation’s debt. Also, funds for numerous other critical government programs -- like the Children's Health Insurance Program (CHIP) that provides health insurance coverage for nine million low-income children -- are also set to expire on September 30 and need to be reauthorized and funded by Congress.
The problem with Congress not returning until September 5 (the day after Labor Day) is that it leaves only 12 working days when both houses of Congress are in session prior to September 30. There are serious concerns that there simply is not enough time to get all the must-pass legislation done ahead of the end of the fiscal year.
Thus, the threat of a government shutdown is very real this time around, especially in light of the heated divide between Republicans and Democrats -- and a president who last week said (stupidly!) that a government shutdown might not be a bad idea.
Whether you are a Democrat or a Republican, you need to know the challenges facing Congress in the very short time left before the end of the fiscal year on September 30. I’ll go through the list for you below. Let’s take them in order of importance.
Government Funding – A Federal Budget For Fiscal 2018
Congress must pass a new federal funding bill (budget) by September 30 to prevent a government shutdown on October 1, which is when fiscal year 2018 begins. In previous years, because politicians waited until the last moment to address difficult issues, lawmakers have opted to pass temporary “continuing resolutions” (CRs) to keep the government running at current spending levels for a few more months – in lieu of passing a new budget for the next 12 months.
Most budget experts and congressional aides look for Congress to follow that same pattern this year, likely punting the budget debate over 2018 funding until later this year – beyond the September 30 deadline.
Where Does Federal Spending Go? $3.8 Trillion in 2015
Source: Treasury Department
If lawmakers want to lift spending levels for the military and domestic programs like those within the Department of Homeland Security and the Department of Veterans Affairs, they'll have to pass a formal budget deal to raise the spending caps set by the 2011 Budget Control Act. Congress has twice raised these levels -- in 2013 and 2015.
President Trump’s Border Wall & Government Shutdown
I digress briefly here to address the issue of funding for President Trump’s controversial border wall. The president said last week (very stupidly in my opinion) that he would let the government shut down if the FY2018 federal budget doesn’t include funding for his border wall.
I’m not necessarily opposed to the border wall, but the president threatening to shut down the government if he doesn’t get his way on the border wall, is simply childish. The Democrats will never go along with, much less fund, a border wall. And it remains to be seen if there are enough Republicans to pass such funding. I doubt it. Trump has to know that.
In any event, a fight over border wall funding is more likely to play out in December when a more comprehensive negotiation over government spending could take place. A government shutdown is not necessarily out of the question, even though Republicans control the House, the Senate and the presidency.
Lawmakers Must Increase the Debt Ceiling Just Ahead
Lawmakers will also have to raise the debt ceiling by the end of September or early October as the national debt hits the structural limit. Treasury Secretary Steve Mnuchin has repeatedly pleaded with congressional leaders to pass a so-called “clean” increase in the debt ceiling – one with no other legislation attached to it. Yet Democrats and Republicans alike want to add some goodies onto the measure – either to increase spending or cut spending, etc.
The White House has signaled that it wants no drama surrounding this debt ceiling vote. The Office of Management and Budget Director Mick Mulvaney called for the “cleanest possible” debt limit increase earlier this month.
Source: Treasury Department
Congress might attach a clean debt limit increase to a continuing resolution (CR) and then suspend the debt ceiling for a few years, as it’s done in previous situations. Or it could suspend it for a few extra months to allow for a more comprehensive solution over the federal budget and debt beyond the September 30 deadline.
In any case, there will almost certainly be a big political fight over raising the debt limit. Lifting the debt ceiling is never as easy as it sounds. And the threat of a government default is always very unsettling to the markets.
Chaos if Congress Doesn’t Raise the Debt Ceiling
First off, no one knows exactly when the Treasury will run out of borrowing authority and have to cease paying some of the nation’s bills. The Congressional Budget Office and the Bipartisan Policy Center estimate that the so-called “X-date” will arrive sometime between October 1 and October 15. This is why lawmakers are being pressured to raise the debt limit by September 30.
Defaulting on any US legal obligations is a scary prospect without real precedent. Financial markets likely would plunge at least temporarily, and interest rates could spike higher (already happening, see below). If the impasse isn’t resolved quickly, the economy will suffer.
Absent action on the debt ceiling, the Bipartisan Policy Center calculates that the Treasury would fall short by $80 billion in October, meaning it couldn't pay 23% of all its bills for that month – assuming the X-date arrives early in the month.
Whenever the X-date arrives, the Bipartisan Policy Center warns: “On a day-to-day basis, handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, military active duty pay) would quickly become impossible.”
The choices facing Mnuchin would be unpalatable. In short, it would be CHAOS!
Children’s Health Insurance Program Set to Expire
Congress faces the same September 30 deadline to approve new legal authority and funding for the Children’s Health Insurance Program (CHIP). The Kaiser Family Foundation projected in May that if lawmakers don't extend the funding, then all states would exhaust all of their federal funds for the critical program in fiscal 2018, which begins October 1.
In the last fiscal year, the Kaiser Family Foundation said CHIP provided health insurance to nine million children in families who earn too much money to qualify for Medicaid but don't usually have access to affordable coverage.
President Trump’s 2018 budget blueprint proposed reauthorizing CHIP funding for two years, but called for funding cuts that would result in a net saving of $5.8 billion over a decade. He also asked Congress to cap the eligibility levels for the program.
National Flood Insurance & FAA Funding to Expire
The National Flood Insurance Program, which is run by the Federal Emergency Management Agency (FEMA), is scheduled to run out of funding at the end of September. The program was created by a 1968 law and is part of the federal government’s effort to limit damage created by floods such as the aftermath of Hurricane Katrina in 2005 and Superstorm Sandy in 2012.
Lawmakers want to reform the program, with some Republicans in the House proposing plans that would lead to the program’s privatization. A bipartisan bill was introduced in the Senate last month that would extend the program’s authority and funding for six years, but it remains to be seen if it will pass in time.
The National Flood Insurance Program is even more critical now with the devastation caused by Hurricane Harvey. On that note, our hearts and prayers go out to our fellow Texans in coastal and south-central Texas who have been devastated by this natural disaster.
Congress also faces a September 30 deadline to reauthorize the Federal Aviation Administration (FAA), which is must-pass legislation. Lawmakers last passed a bill to keep the agency operating in July 2016.
President Trump and some Republicans on Capitol Hill are interested in separating air traffic control from the FAA and transferring its operations to an independent outside agency – in essence privatizing the FAA. Democrats would likely oppose this plan if it comes to the floor of either chamber.
There are several other government programs that face funding deadlines on September 30 but the above-mentioned agencies are considered the most critical.
Then there are other important issues President Trump is pushing Congress to pass before the end of the year.
Obamacare “Repeal and Replace” & Tax Reform
The president has urged Congress over the August recess to continue working toward repealing and replacing the 2010 Affordable Care Act, even blasting Senate Majority Leader Mitch McConnell for his inability to pull off that effort earlier this summer. While McConnell has left the door open to revisiting healthcare, few Senate Republicans have the stomach to do so.
The White House is also hoping that the House passes a major overhaul of the tax code in October, with Senate passage in November. While some key Senate Republicans want to tackle the issue on a bipartisan basis, McConnell ruled that option out before the August recess.
He said that the GOP-controlled Congress would take it up using the budget “reconciliation” process as they attempted with healthcare. The process allows for certain legislation to pass in the Senate with 51 votes rather than 60 votes. McConnell added before the recess:
“We will need to use reconciliation because we have been informed by the majority of the Democrats in a letter I just received today that most of the principles that would get the country growing again, they are not interested in addressing.”
I am not optimistic that Congress will get around to tax reform this year. In my view, lawmakers should cut the corporate income tax rate to 15% (or at least 20%) before the end of this year, even if broad tax reform has to wait until next year. They should also enact a one-time tax cut, say 10%, for the repatriation of corporate profits held outside the US.
In addition, there is widespread support for expanding the standard tax deduction for families and individuals. These three reform measures alone should be enough to get the economy humming at 3% growth or more. Lawmakers should do these three things as soon as possible.
The president also unveiled his huge infrastructure plan last week. He wants it passed before the end of this year, but most in Washington seem to believe that congressional action on that legislation will not happen until next year.
In closing, it will be very difficult for Congress to agree on a new budget, raise the debt ceiling, fund and extend agencies such as CHIP, Flood Insurance, the FAA and others by the September 30 deadline. It remains to be seen if lawmakers can unite to make these critical decisions happen in time.
Given the acrimony in Washington today, and even the discord within the Republican Party itself, I’m not optimistic. If I’m correct, we could be in for some very wild markets just ahead.
Hoping your seatbelt is fastened,
Gary D. Halbert
GOP discord does not bode well for raising debt ceiling
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