Another Budget Battle?

Update 490 — Another Budget Battle?
Over What? And How Can the Fed Help?

With days dwindling until the December 11 deadline for a budget deal needed to avert a government shutdown, Congress is negotiating yet another Continuing Resolution, which will alter federal spending priorities not at all as economic conditions continue to worsen. What’s the fighting over this time?

These negotiations will likely come down once again to a fight over funding for Trump’s border wall. The $2 billion in question is meager compared to the money possible for fiscal relief freed up by repurposing half a trillion dollars in unused Federal Reserve funds. Details below.

Good weekends, all….

Best,

Dana

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Senate Majority Leader McConnell has fewer excuses than ever not to legislate, with the economy stuck in neutral. Before the end of the lame-duck session, Congress will need to reach several agreements on the FY 2021 appropriations bills, further COVID relief, and defense. 

In September, Congress passed a Continuing Resolution (CR) that will expire on December 11, giving House Speaker Pelosi and McConnell just less than a month to reach a deal. Yet the Senate has adjourned until the end of November, narrowing time tables even further. Below, we cover the appropriations negotiations, potential sticking points, and possible assistance from an unlikely source. 

Status of Negotiations

After months of stalling, budget negotiations resumed last week. During the summer, Senate Appropriations Chair Shelby refused to consider the Senate bills in Committee because Democrats intended to introduce amendments regarding COVID relief and police reform. Now, Shelby and House Appropriations Chair Lowey are in negotiations over funding levels for the twelve appropriations bills.

Both Pelosi and McConnell are aiming to pass an omnibus spending bill, with specific funding levels for each discretionary program, rather than another CR. McConnell signaled after a meeting Wednesday with Trump’s Chief of Staff Mark Meadows that the president would be willing to sign an omnibus spending bill. 

When the Senate returns on November 30, Congress will have only 12 days to reach an agreement, pass the omnibus bill, and get Trump’s signature. If unsuccessful, Pelosi and McConnell will need to pass another CR or risk yet another government shutdown.

Trump could also throw a wrench in the process. Since the election, the White House has been silent on the budget negotiations. Despite McConnell’s and Pelosi’s optimism, Meadows said yesterday that there might still be a shutdown. Republican Senators have anonymously expressed skepticism that Trump would sign a budget package. If a shutdown occurs, it would be the third during Trump’s presidency. 

A lengthy shutdown would be disastrous for our economic recovery. Legislators would need to direct their full focus towards reaching a budget agreement, unable to pass any COVID relief or stimulus. Meanwhile, renter protections, suspension of student loan payments and interest accumulation, Pandemic Unemployment Assistance, and Pandemic Emergency Unemployment Compensation expire at the end of the year. If a shutdown occurs and it lasts into 2021, millions of low-income Americans will be thrust into even deeper economic precarity. The Department of Health and Human Services estimates that the expiration of the pandemic unemployment programs specifically will push the poverty rate for August-December to 13.6 percent, over three percent higher than the 2019 poverty rate. 

Syncretizing House and Senate Budget Bills

The House Appropriations Committee passed almost all of its appropriations bills back in July, but the Senate Appropriations Committee just released its bills last Tuesday. Sens. Shelby and Leahy said that almost 90 percent of the material in the 12 bills are agreed to. The two sides are in almost complete agreement on funding for Departments of Transportation, Housing and Human Development, and Treasury.

While the House and Senate bills have similar price tags, the two approaches differ in some important aspects, and several sticking points may prevent the two legislative bodies from agreeing on a 2021 omnibus:

  • COVID Relief: While Speaker Pelosi and Majority Leader McConnell have kept the COVID relief and omnibus negotiations separate, the Democrat-led House contains nearly $250 billion in emergency funds related to the pandemic and economic downturn in its appropriations bills and wants a few trillion more in COVID-related tax and entitlement provisions. It seems unlikely that Senate Republicans and House Democrats will reach an agreement on stimulus soon. If a standalone aid package can’t pass the Senate, Democrats may insist that COVID relief provisions be tacked onto a must-pass spending bill. 
  • Immigration and the Border Wall: The Senate’s FY21 Homeland Security Funding Bill increases spending on immigration enforcement, including $1.96 billion for Trump’s border wall. These non-starters for Democrats led to the government shutdown of 2018-2019 — the longest shutdown in U.S. history. The House Homeland Security bill provides no additional border wall funding and explicitly prohibits Trump from shifting resources from other accounts to pay for wall construction.
  • Police Reforms: House Democrats’ inclusion of $597 million for police reform will be another sticking point in negotiations. The House 2021 appropriations bill for the departments of Commerce and Justice would fund independent and community-based investigations and initiatives to improve local law enforcement training and boost police-community relations.
  • Other Issues: Democrats criticized the Senate GOP appropriations bills for its decreased funding for the State Department’s family planning initiatives, inadequate funding of Interior’s climate change initiatives, and low funding of the Departments of Labor and Education. 

Biden Budget Considerations

If Congress passes another CR rather than an omnibus bill, Biden will likely play a part in the next 2021 FY negotiations. Candidate-Biden made a show of rejecting the bold, progressive, big-government plans of his Democratic rivals both before and after the 2020 primary. Per a University of Pennsylvania Wharton School study, the former vice president’s budget proposals add up to about $5.4 trillion in new spending over the next 10 years — more than double the amount Hillary Clinton proposed in 2016. Much of this is due to the pandemic, the lockdowns, and the resulting recession.

Spending and revenue under Biden plan, 2021-2030

Source: Penn Wharton Budget Model

On the stump, candidate Biden called for substantial investments in infrastructure and public education, as well as for the provision of health insurance and child care. And on Wednesday, the President-elect urged the passage of the $2.2 trillion updated-HEROES Act. In terms of revenue raisers, Biden’s budget plan takes into account a full-scale repeal of the Trump tax cuts as well as instating new payroll taxes on those earning at least $400,000. 

New Purpose for 13(3) Programs Funds?

The Federal Reserve’s 13(3) facilities are set to expire on December 31 of this year. Yesterday, Secretary Mnuchin sent a letter to Federal Reserve Chair Powell asking that the unused $196 billion in Treasury backstops be returned to the Treasury by December 31. While Powell could ignore the request, he may not, and over $400 billion in potential relief will disappear in January. Several Democrats, such as Sen. Sherrod Brown, have spoken out against Mnuchin’s proposed clawback. Instead of returning much needed and already appropriated funds to the Treasury’s coffers, these funds could instead be repurposed towards additional COVID relief. The omnibus negotiations may be Democrats’ only opportunity to repurpose the money or extend the programs into the next year. 

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