APCO Worldwide Analysis: U.S. Government Funding and Debt Authorization Deal

APCO WorldwideU.S. Government Funding and Debt Authorization Deal:  History Repeats Itself

What Happened?

After a two-week government shut-down and just one day before the U.S. Treasury Department said it would exhaust its borrowing authority and breach the so-called debt ceiling, Congress agreed to a short-term plan to re-open the federal government and raise the debt ceiling.  While the deal should calm markets and provide more economic and political stability for the remainder of the year, a similar crisis could repeat itself in January 2014 because the fundamental political dynamics that created the crisis have not changed – and are not likely to change.

Though the final deal included some small concessions to critics of raising the debt ceiling, and is only temporary – the government will be opened until just January 15 and the debt ceiling is raised until February 7 – it was very close to the “clean” extension that President Obama had insisted be part of future negotiations.  Republicans did get a commitment for a formal Congressional conference committee to address short-and long-term budget issues and one minor provision to prevent fraud with subsidies under the Affordable Care Act (“Obamacare”), but neither is considered to be significant for Republicans given the political cost of the government shutdown.

Why Was There a Crisis?

There is a fundamental and increasingly polarized disagreement between Republicans and Democrats over the role, scope, and size of government that has been exacerbated in recent elections by the rise of the “Tea Party” movement of fiscal conservatives determined to restrain federal spending.  The political landscape and structure of the executive and legislative branches remains essentially unchanged since 2011 (Democratic President, Republican House, Democratic Senate), meaning that consensus and solutions continue to be very difficult to achieve.

At the center of these crises has been an attempt by House Republican leadership, particularly House Speaker John Boehner, to balance multiple factions within his caucus and effectively work with President Obama and the Senate.  As we saw in 2011 debt crisis, the 2013 agreement over the “fiscal cliff” crisis and the current agreement, Speaker Boehner has had difficulty uniting Tea Party and more moderate conservatives to pass legislation acceptable to the Senate and President Obama.  This dynamic will continue into 2014.

What is the Impact?

The deal is considered a victory for President Obama, who was able to galvanize his base after refusing to negotiate with Republicans until the government was re-opened and the debt ceiling was raised.  Given past budget negotiations, Republicans miscalculated that the president would ultimately make concessions after the government was partially closed and the debt ceiling limit approached.  In the end, though, Republican and Democratic leaders in the senate forged a deal, forcing House Republicans to abandon their strategy, which initially revolved around trying to defund the Affordable Care Act, and support re-opening the government and raising the debt ceiling.

The political costs over the standoff are significant.  While recent polling shows increasing disapproval of the president and both political parties, Republicans suffered the most damage.  Gallup’s polling indicates that the Republican Party has the highest disapproval in the 24-year history of the survey.  While the long-term implications are unknown, some analysts believe that Republicans could be at risk of losses in the 2014 midterm elections that could threaten their majority in the House of Representatives and prevent them from taking control of the Senate.

However, this is not a complete victory for Democrats.  A short-term extension guarantees that budget and funding issues will remain the top public policy issue for the foreseeable future and will prevent Congress from considering other issues important to the White House and Democrats.  At the same time, the deal provides several opportunities for Republicans to continue pushing for limited federal spending and structural reform as part of future negotiations.  The American public, though disapproving of the current tactics in Washington, is concerned over government spending and Democrats and the White House will need to demonstrate a good faith effort to reach a long-term solution to the ongoing budget crises.  Importantly, by doing little more than “kicking the can down the road” Congress has made it almost impossible to make progress on other priorities such as comprehensive immigration reform.

What Happens Next?

This agreement funds the federal government just past the start of the year and provides time for Congress to re-focus its attention on the greater budget issues while concluding its remaining legislative business for the calendar year.  While it is very unlikely that large issues such as tax reform, immigration reform, the elimination of 2013 spending cuts (sequestration cuts), or changes to the Affordable Care Act will be addressed, Congress may be able to address smaller issues individually, such as repeal of the unpopular medical device tax that partially funds the Affordable Care Act, judicial and administration nominations and other smaller matters.

But, as with previous agreements, the deal simply delayed serious discussions to resolve ongoing budget issues.  Once again, Congress faces a number of deadlines that will require negotiation and will likely result in public disputes as each side seeks political advantage.

  • As part of the deal, a legislative committee will be formed and tasked with developing recommendations by December 13 of this year for a long-term budget blueprint for tax and spending policies over the next decade.  However, given the current environment and limited time to work, it will be difficult for the committee to reach a consensus.
  • Congress will have to pass legislation to fund the government beyond January 15.
  • Congress will once again have to raise the debt ceiling in advance of February 7.
  • Across-the-board spending cuts that were part of the 2011 deal (sequestration cuts) will continue in 2014 unless renegotiated as part of the upcoming budget talks.  Both parties would like to eliminate or renegotiate aspects of the cuts.

Discussion is likely to return to a “grand bargain” of long-term spending cuts to government entitlements in addition to discretionary budget items combined with increased tax revenue, ultimately forming a plan to pay down the U.S. national debt over a period of 10 years or more.

The recent warning by Fitch’s financial rating service, placing the U.S. under a “negative warning” sends a signal to all in Washington that a bipartisan agreement on long-term solutions is needed.  Indeed, it is the “the political brinkmanship” that places the United States’ AAA credit rating at risk, not a belief that the United States will default.  Markets reacted positively to the likelihood of a deal and market value should continue to increase incrementally following this deal, as what happened in 2011.

However, the track record is not good and few are optimistic that these negotiations will be different from previous 2011 talks between Speaker Boehner and President Obama that fell apart over details of a “grand bargain” for a long-term U.S. budget.  Thus, 2014 budget and debt ceiling discussions could look very much like 2011 (and 2013), unless both sides are willing to adopt less hardline positions and find a bipartisan solution to the United States’ fiscal problems.

In short, the latest chapter is unlikely to be the last in the U.S. budget battles.  After a particularly bruising episode of recent weeks, each side will assess their new political position and recalculate strategy in advance of further battles in 2013 and into 2014.

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