Update 690 — From Extraordinary to X-Date
Dangerous Month Ahead for the Debt Limit
President Biden will meet with Congressional leaders from both parties on Tuesday, May 9, to discuss the debt limit. The meeting comes on the heels of Secretary Yellen’s announcement this week that the federal government could breach the debt ceiling as soon as June 1, earlier than had been expected.
At the table will be House Speaker McCarthy, pushing for concessions related to the draconian budget cuts and burdensome work requirements in the Limit, Save, Grow Act – legislation that passed the House last week by a narrow margin. Even though this bill will undoubtedly stall out in the Senate, it has enough support that the fiscal concessions in it that the GOP is demanding will require a rapid, vocal, and united defense by the Democratic party.
Relatedly, please join us next Tuesday, May 9, for a discussion of the dangers of near-default leading up to the X-date, featuring Mark Zandi of Moody’s Analytics and Morris Pearl of Patriotic Millionaires.
Until next week…
X-Date Closer than Expected
On Monday, Treasury Secretary Yellen sent a letter to Congressional leadership informing them that extraordinary measures could be exhausted as early as June 1st. If Congress does not raise or suspend the debt limit by then, the federal government may be unable to meet its financial obligations and enter into default.
Earlier estimates gave Congress until Summer to Fall to address the debt limit crisis, but as tax receipts rolled in this year, it became clear that action would be needed by the end of May. President Biden, Speaker McCarthy, House Minority Leader Jeffries, Senate Majority Leader Schumer, and Senate Minority Leader McConnell are set to meet next Tuesday to discuss the debt limit and budget negotiations, their first such meeting since February.
President Biden and Democratic leadership have held firm that they will not negotiate on the debt ceiling and that it must be raised or suspended without other demands. Republicans, however, are hoping to use the threat of default to enact large budget cuts that would threaten education, healthcare, transportation, public safety, and a broad range of government services. Their proposal, which narrowly passed the House along party lines last week, would have devastating effects on working families and the economy at large.
According to testimony by Dr. Mark Zandi, Chief Economist of Moody’s Analytics, before the Senate Budget Committee, the bill Republicans have put forward would threaten economic growth in the near-term. Real GDP growth in 2024 would be .67 percentage points lower under the Limit, Save, Grow Act than under a clean debt limit scenario. Employment would also be 790,000 jobs lower than under the clean debt limit scenario, and unemployment would be .37 percentage points higher. The bill would also “meaningfully increase” the likelihood of a recession in an already fragile economy.
Relatedly, the anxiety in the markets became palpable this week. Investors drove one-month Treasury bills from a yield of 3.83 percent last week to 5.84 percent now — the highest ever for that maturity. The maturity date is June 6. See below.
Treasury Sold Four-Week Bills at All-Time High Yield
Source: US Treasury, Bloomberg
The Limit, Save, Grow Act
House Republicans’ proposal for raising the debt limit, The Limit, Save, Grow Act, would raise the debt ceiling by $1.5 trillion or suspend it until March 31, 2024, whichever comes first. In exchange for pushing off default by less than a year, the bill would make massive cuts to discretionary spending, expand burdensome reporting requirements for SNAP, Medicaid and TANF, rescind portions of the Inflation Reduction Act dealing with the IRS and the environment, rescind unspent COVID funds, and bar the Department of Education from providing student debt relief.
The Republican bill would cut discretionary spending in FY2024 by roughly nine percent compared to FY2023. For the next ten years, growth would be capped at one percent, well below the expected rate of inflation, resulting in cuts to discretionary programs of over $3.6 trillion over ten years. If those cuts are limited to non-defense discretionary (NDD) programs, the cuts would be even more drastic.
While the Limit, Save Grow Act does not explicitly protect defense or veterans’ healthcare, Republicans have repeatedly asserted their intentions to avoid cuts to either. If Congressional Republicans keep to their word on veterans’ health care and defense, all other NDD programs would need to be cut by 33 percent in 2024 and 59 percent in 2033 compared to CBO’s baseline, which adjusts for expected inflation levels after 2023.
In March, the heads of 21 agencies sent letters to House Appropriations Ranking Member Rosa DeLauro estimating the impacts that 22 percent across-the-board cuts– roughly the level needed to protect defense spending and some veteran’s health spending while cutting discretionary spending back to FY22 levels– could have on their agencies. The picture painted by these letters is stark– Secretary of Housing and Urban Development Marcia L. Fudge wrote that “Under the 22 percent potential funding cut scenario, it would be impossible to stave off mass evictions.” Cuts of this size would also lead to:
- 640,000 fewer families receiving assistance through the Housing Choice Voucher program
- The elimination of 101,000 childcare slots and 200,000 slots for Head Start
- Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) program providing services to roughly 1.5 million fewer participants than currently projected next year
- Cuts to Title I Grants of roughly $4 billion, the equivalent of removing over 60,000 teachers and related service providers from classrooms, impacting roughly 25 million students
The bill requires Medicaid beneficiaries aged 19 to 55 to report 80 hours of covered work activity a month or lose their coverage. According to the Department of Health and Human Services analysis, roughly 21 million Americans’ health coverage and access to care would be jeopardized by the Republican plan due to expanded reporting requirements. When Arkansas implemented similar work requirements for just seven months, 1 in 4 covered adults lost their healthcare coverage. Many of those who lost coverage did so due to administrative burden, and the policy did not lead to an increase in employment. In fact, studies suggest that those who lost their coverage experienced increased financial hardship and delayed receiving medical care due to cost.
The bill would also expand existing SNAP work requirements to include older adults, aged 50 to 55. As with Medicaid, SNAP work requirements do not increase employment, and many people who are eligible for exemptions from the requirement or who are working may lose their benefits due to difficulty navigating red tape. Over 900,000 individuals are at risk of losing their food assistance under the bill.
Finally, the bill imposes additional TANF work requirements and limits states’ flexibility to offer assistance to families who cannot meet strict work requirements. 540,000 families with almost a million children would be at risk of losing cash assistance under the Republican bill.
According to CBO estimates, the amount of money saved over the next decade by instituting new requirements for SNAP, Medicaid and TANF is roughly equal to the net cost of rescinding funding for the IRS that was intended for increasing enforcement activities against wealthy tax cheats. The roughly $120 billion that rescinding this funding would cost the government over the course of the next decade will largely come from lost revenue from increased tax compliance and auditing of high-income individuals.
The bill would end the current repayment pause for federal student loans, cancel President Biden’s student loan forgiveness, and prevent the administration from making proposed changes to income-driven repayment plans. It would also limit the administration’s ability to make future changes to federal student loans.
April Showers … What will May Bring?
Congress must act quickly to raise the debt limit. The closer we get to the deadline, the more that market uncertainty grows. In 2011, the threat of Congressional inaction led S&P to downgrade the United States’ credit rating for the first time in history, and markets are already showing signs of distress. Congress must move to pass a clean debt ceiling increase as quickly as possible to avoid a repeat of the 2011 crisis.
Congress must also avoid another mistake from 2011, namely conceding to harsh and unrealistic budget caps that hamper federal agencies’ ability to carry out their missions. The 2011 Budget Control Act was responsible for decade-long budget caps that left agencies understaffed, underfunded, and unable to keep up with inflation or expanding responsibilities.
The Limit, Save, Grow Act would both exacerbate the problems created by the 2011 Budget Control Act and fail to offer even a full year’s reprieve from the threat of default. If the idea is to “grow” the economy, the bill is misnamed; almost every provision in it is contractionary, not stimulus. If anything, the bill highlights the urgent need to enact a clean debt limit increase now and address disagreements about the budget through the regular budget and appropriations process.
The May 9 meeting is unlikely to produce any immediate results, but it will kick off weeks of discussion we anticipate will bring us closer to the edge of default by Memorial Day than we have gotten yet, with consequences that will be visible, if not inescapable, before then.