Congress Finally Passes Debt Ceiling Compromise - What's Next?
By Denise Bode and Lucinda Geller
Late last week, the Senate passed legislation to suspend the debt ceiling and restrict government spending through the 2024 election, ending a drama that threatened a global financial crisis. The measure was signed Saturday by President Joe Biden, who forged the deal with Speaker Kevin McCarthy (R-CA) and plans to sign it just days before a looming U.S. default.
The congressionally approved legislation would suspend the debt ceiling through Jan. 1, 2025, and set spending caps for FY24 and FY25. Those caps would limit defense spending to a 3.3% increase in 2024 and a 1% increase in 2025, while non-defense discretionary would be cut 8% in 2024 before rising 1% in 2025 — though Democrats plan maneuvers to lessen the non-defense cuts.
See the full breakdown of the bill by Constitution Partners here and the full bill text here.
The 63-36 Senate vote on the bill was carried by moderates in both parties. Many of these Senators aired their misgivings about parts of the deal but were convinced that their concerns weren't worth risking the havoc a default would unleash. Ultimately, they settled on allowing uncharacteristically speedy votes on 11 amendments, all of which failed.
Senate passage ends the worst standoff over the U.S. debt in a dozen years. But it comes at some political cost for Biden and McCarthy, who have taken criticism from lawmakers on their respective party’s flanks who insist too much was given away in the negotiations. Congress can now return to its regularly scheduled programming with the farm bill, an FAA reauthorization, and other measures that took a backseat during the debt ceiling negotiations.
Permitting Reform Included
In a big win for the West Virginia delegation led by Sen. Joe Manchin (D-WV) and Sen. Shelly Moore Capito (R-WV), the Mountain Valley Pipeline being built through West Virginia was Congressionally mandated. The oil and gas sector, including the American Petroleum Institute and the Liquid Energy Pipeline Association, cheered the deal but said they’re still seeking more changes to the permitting process. The debt compromise includes a more focused NEPA process with reasonably foreseeable options related to the purpose and need of the project, page limits on environmental assessments including a one-year deadline for producing environmental assessments and a two-year maximum for environmental impact statements, and limits on agency reviews. Left undone are amendments to the Clean Water Act stopping state abuse of their project review authorities and lengthier preservation of Nationwide Permit program use for pipelines.
But, without significant improvements in transmission, the nation could fail to meet its climate goals, said Jason Grumet, CEO of American Clean Power Association. “It is critical that Congress build upon these initial steps,” Grumet said in a statement. While lawmakers across the political spectrum agree transmission infrastructure needs improvement, Republicans say they are wary of the Democrats’ approach, which would treat transmission permitting differently than pipelines. That’s why an electric grid provision from Rep. Scott Peters (D-CA) and Sen. John Hickenlooper (D-CO) ultimately failed to make it into the debt agreement. Stakeholders are hopeful that in the coming weeks, more will be done to engage with transmission and electric grid concerns. However, the inclusion of the Mountain Valley Pipeline approval in the bill could slow momentum for more permitting improvements according to sources on the Hill that hoped the agreement could have been more expansive.
Defense Spending Levels in Agreement of Concern
Some members have voiced their frustration with the overall process of handling the debt limit revision. Sen. Lindsey Graham (R-SC) said that “I will never let this happen again as long as I’m here, to let people negotiate behind closed doors and not tell me what they’re doing on defense.” He also criticized McCarthy’s method of negotiating, saying he will no longer trust him. Sen. Susan Collins (R-ME) agreed with Senator Graham, saying the defense spending level falls “woefully short.”
Defense hawks led by Sen. Lindsey Graham of South Carolina complained strongly that military spending, though boosted in the deal, was not enough to keep pace with inflation — particularly as they eye supplemental spending that will be needed this summer to support Ukraine against the war waged by Russian President Vladimir Putin. “Putin’s invasion is a defining moment of the 21st century,” Graham argued from the Senate floor. “What the House did is wrong.” They secured an agreement from Schumer, which he read on the floor, stating that the debt ceiling deal “does nothing” to limit the Senate’s ability to approve other emergency supplemental funds for national security, including for Ukraine, or for disaster relief and other issues of national importance.
Patty Murray (D-WA) also criticized the spending levels set under the bill, saying lawmakers should do away with the debt ceiling and take “the threat of default off the table, once and for all.” Rep. James Clyburn (D-SC), the former Democratic whip, joined Murray in calling for an end to the debt limit. “We do not need to have this debt ceiling,” Clyburn said on Bloomberg TV’s “Balance of Power” yesterday. “We need to get rid of it.” He added he’d like to “get this vote done and then next week start working on eliminating this debt ceiling.”
What is Next?
Looking ahead, although the bill erases the fear of default until January 2025, Congress still has work to do to actually fund the government before Oct. 1 or face a possible shutdown. To incentivize Congress to do this, a 1 percent funding cut is included in the bill that will kick in if lawmakers settle for a stopgap spending bill for the coming fiscal year, rather than pass an actual government funding package. With the unhappiness of some on the Republican right, it isn’t unfathomable. Remember, Congress hasn’t passed all 12 appropriations bills on time since 1996.
Senator McConnell and Schumer have both now gone on record with their concerns that the bill does not do enough to deter Russian and Chinese competition as was mentioned earlier. They also released a joint statement that says top appropriators will now look to set the 302(b) funding totals for all 12 annual spending bills, mark up those dozen measures and bring them to the floor in a timely fashion. The statement came after Republicans sought a commitment from Senate leaders that they would bring the spending bills to the floor, hoping to avert a 1 percent funding cut that would kick in if lawmakers settle for a stopgap spending bill for the coming fiscal year, rather than pass an actual government funding package.
What About The Markets?
By law, the Treasury Department is obligated to make any funds that were affected by the extraordinary measure whole. It is also required to pay interest on the lapse in funding. The Treasury plans to do this through an unusual measure and auction off $15 billion worth of one-day cash management bills on Friday, June 2. Over the last 25 years, the Treasury has only held six one-day auctions.
Although the Treasury is expected to get an infusion of cash from tax payments due June 15, it will owe interest payments that day, too — mid-month interest payments are usually around $3 billion, the Congressional Budget Office (CBO) said. End-of-month payments have ranged from $10 billion to $16 billion over the past six months. But the Treasury’s immediate cash demands could throw a wrench into the stock market, which for the most part has ignored the risks of default.
Credit rating agencies could still downgrade U.S. debt. The first-ever downgrade of U.S. debt happened in 2011, days after lawmakers signed a deal, Standard and Poor’s downgraded US debt from its highly coveted AAA status due to a loss in confidence in the country’s ability to repay its debts from months of negotiations among lawmakers. That sent markets sharply lower.
After the bill passed, Fitch's Senior Director said, “Although the resolution of the U.S. debt limit impasse allows the government to meet its obligations” Fitch is maintaining the negative watch while it considers “the full implications of the most recent brinkmanship episode and the outlook for medium-term fiscal and debt trajectories.” If Fitch, one of the top credit rating agencies downgrades U.S. debt, it could cause yields on Treasury notes to spike, underscoring the increased risks associated with holding US debt. That would increase the cost of borrowing money since banks and other lenders often base interest rates on US bond yields. However, the opposite occurred after S&P downgraded US debt in 2011 — investors shrugged it off and bought more bonds, sending yields lower.
