While a breakthrough hasn’t happened yet in Washington’s debt-ceiling standoff, there is increasing chatter about what could go into a bipartisan deal that ends the stalemate and avoids a market-shaking default.
“The centerpiece of an obvious deal would be a two-year cap on discretionary spending, somewhere in between the president’s 6% proposed increase and the Republicans’ 9% proposed cut,” said Brian Riedl, a senior fellow at the conservative-leaning Manhattan Institute who focuses on budget, tax and economic policy.
“Both sides need to come to a discretionary top-line figure in the next couple of weeks to begin the appropriations process anyway, so they may as well put that into the debt-limit negotiations,” Riedl told MarketWatch.
“By doing this, both sides can claim victory by moving the other side off of their position on discretionary spending,” added Riedl, who previously was a top staffer for former Ohio GOP Sen. Rob Portman. “It’s easy to pass. It’s a one-page bill that could be drafted in 30 minutes.”
House Speaker Kevin McCarthy and his fellow Republicans have been demanding spending cuts in exchange for raising the ceiling for federal borrowing, while President Joe Biden and his fellow Democrats have said the lift should be made without conditions.
Other parts of the possible deal are expected to center on energy-permitting reforms and unused COVID-19 aid — and potentially tougher work requirements for recipients of some federal assistance.
Permitting, COVID funds, work requirements
GOP Rep. Garret Graves of Louisiana, a key ally of House Speaker Kevin McCarthy, told reporters last week that House Republicans believe there is room for an agreement that involves rescinding unspent COVID-19 funding, permitting reform, limits on discretionary spending and tougher work requirements for some recipients of federal aid.
Biden sounded open to clawing back some unspent COVID-relief funds as he took questions from reporters on May 9 following his first debt-limit meeting with the top four U.S. lawmakers.
“We don’t need it all,” Biden said, regarding the pandemic aid. “I have to take a hard look at it. It’s on the table.”
Read more: Debt-ceiling talks involve taking back unspent COVID funds: ‘It’s a nice hunk of change’
In addition, the Biden White House last week released a statement outlining its priorities for permitting reform, in a sign there are discussions on that subject.
“Permitting reforms and COVID rescissions can be relatively bipartisan additions to the package to broaden its appeal and scope, but anything related to the Inflation Reduction Act — such as the energy-tax credits or IRS funding — has no chance of making it into a bipartisan deal,” the Manhattan Institute’s Riedl said, referring to the Internal Revenue Service. “Work requirements are also going to prove too toxic for Democrats to be part of a deal.”
The debt-limit bill passed by the Republican-run House on April 26, dubbed the Limit, Save, Grow Act, included provisions that would roll back parts of the IRA, but it was widely viewed as a messaging bill that was “dead on arrival,” or DOA, in the Democratic-controlled Senate. Democrats have, in fact, often referred to the legislation as the Default On America (DOA) Act.
But some analysts have predicted that stricter work requirements for federal programs could end up making it into a final deal, and Biden suggested on Sunday that he might be open to such requirements.
“I voted for tougher aid programs that’s in the law now, but for Medicaid it’s a different story, and so I’m waiting to hear what their exact proposal is,” the president told reporters on Sunday. With that remark, he seemed to be referring to his 1996 vote as a U.S. senator for a welfare reform bill that established the Temporary Assistance for Needy Families (TANF) program, which has work requirements.
On Wednesday, Biden said it’s possible there could be a few new work requirements, “but not anything of any consequence.”
Related: Biden expresses confidence Wednesday on achieving debt-ceiling deal: ‘America will not default’
Rep. Pramila Jayapal, a Democrat from Washington state who chairs the Congressional Progressive Caucus, told Politico that adding work requirements to the Supplemental Nutrition Assistance Program is “a nonstarter for many of us across the Democratic caucus.” McCarthy, on the other hand, said Tuesday that tougher work requirements must be part of any deal, when asked if they were a “red line” for him.
Overall, there are expectations that stricter work requirements for TANF could be in the cards, while SNAP (also known as food stamps) and Medicaid are less likely to see changes.
Positive vibes, and a possible short-term fix
Both Biden and McCarthy sounded positive about their second debt-limit meeting, which took place Tuesday. Each has talked up how the group of negotiators has narrowed, as the president has appointed senior White House staff to talk with the speaker’s team, rather than having staffers from all four top U.S. lawmakers involved.
In addition, the president said on Wednesday that he’s cutting his Asia trip short to be there for final negotiations and to be able to sign a deal.
Analysts have said it’s key for Democrats to negotiate a budget agreement along with a debt-ceiling hike but to make it seem like the ceiling was not a part of the budget talks, while for McCarthy it’s important to make it seem like he did leverage the borrowing limit for fiscal concessions.
In that vein, Senate Majority Chuck Schumer, a New York Democrat, said in a floor speech on Tuesday that his party is having “separate but simultaneous conversations” with Republicans about a budget deal and a debt-limit hike.
Similarly, Biden on Wednesday said the current negotiations are “about the outlines of what the budget will look like, not about whether or not we’re going to, in fact, pay our debts.”
Treasury Secretary Janet Yellen warned on May 1 and again on Monday that a U.S. default could happen as soon as June 1 if Congress doesn’t raise the federal government’s borrowing limit. The Bipartisan Policy Center and Congressional Budget Office have each offered similar projections.
Due to a “compressed calendar” and outstanding questions on the potential deal, the most likely outcome is that Washington will deliver a short-term extension for the debt limit by June 1, according to Chris Krueger, managing director at TD Cowen’s Washington Research Group.
“Given the lack of time, we still anticipate the need for a very short-term hike of the debt ceiling as well as likely changes to the congressional schedule (Senate supposed to be on recess next week),” Krueger wrote in a note on Monday. “September is likely the key month for clarity on both discretionary spending and the permitting-reform details.”
Other analysts are also expecting short-term increases or suspensions of the federal borrowing limit in order to provide the Biden administration and Congress with more time to come up with an agreement.
Biden said he’s not ruling anything out besides default when he was asked last week about a short-term increase.
“The good news” is that the meeting on May 9 “kicked off what will be back-channel staff negotiations between the White House and congressional leadership,” Riedl said.
“Unfortunately, however, both sides are probably going to continue playing chicken up until the last minute, because they believe they will have the upper hand if it comes down to the very end. So I think, unfortunately, this is going to go on for a little while.”
In August 2011, lawmakers approved an increase to the limit just hours before a potential government default. Within days, the U.S. lost its triple-A credit rating from S&P for the first time in history, with the ratings agency saying the American political system had become less stable.
U.S. stocks
DJIA,
SPX,
plunged in August 2011 following that downgrade from S&P.
Now read: Debt-ceiling solution? The 14th Amendment, explained.
This story originally appeared on Marketwatch
