Washington is returning now to its perennial fiscal follies. Another government shutdown is unlikely and a default is out of the question, but manufactured showdowns that will exacerbate market volatility and a return to austerity through sequestration are practically inevitable.
The Republican-led House of Representatives this week passed a homeland security funding bill to target President Obama's executive action on immigration. For its part, the White House has threatened to veto the bill. In the coming months, Congress and the president will lock horns over the debt limit and fiscal year 2016 budget.
Not only do the GOP's leaders have to contend with Democrats, but they also face dissent within their own ranks. This is why the House majority structured the homeland security funding measure to also seek to undo Obama's unilateral efforts to pursue immigration reform. House Speaker John Boehner knows full well that such a bill will not only be vetoed by Obama, but will not even garner the half dozen Democratic votes it needs to pass the Senate. By allowing conservatives to vent though, Boehner hopes new Senate Majority Leader Mitch McConnell will be able to avert a shutdown before the current funding expires on February 27. McConnell wants to demonstrate that he can lead and avoid unnecessary brinksmanship.
The real fun will begin this summer when attention turns back to the debt limit. The technical deadline is March 15, but the Treasury Department has the ability through its "extraordinary measures" to postpone the reckoning until somewhere likely between mid-summer and early fall, depending on the extent of tax receipts it receives this year. Treasury Secretary Jacob Lew ultimately determines when the actual deadline is and he will likely ensure that it falls before Labor Day, forcing Congress to pass a debt-limit extension before departing for its annual August recess.
Republicans have had a difficult time reaching consensus on what demands to make of Obama in exchange for raising the debt limit. Obama, meanwhile, has adopted the position that he will not negotiate over the debt limit. This may be more difficult this time, however, as he has relied on the Democratic-controlled Senate in the past to block GOP demands.
Adding to the difficulties this year, the GOP will be able to use its new majority to avail itself of a highly technical legislative tool known as reconciliation. Through the reconciliation process, which can be used once per year, Republicans only need a simple majority in each chamber to advance a bill, as long as it meets certain technical requirements. Reconciliation was used in the past to pass tax cuts under George W. Bush and the Affordable Care Act under Obama.
Of course, in both of those instances, Congress and the White House were under the control of the same party. In this case, even once Republicans decide what to ask for — the list of potential demands includes corporate tax reform, full or partial repeal of Obamacare, and Keystone approval – it is unlikely that Obama will acquiesce, choosing instead to wield his veto pen. But by the GOP advancing its demands all the way to the president's desk, they will take the debt limit standoff into uncharted waters without a clear path forward, raising investors' anxieties. A default is still not going to happen, but we very well could get closer than we ever have before.
Fresh off the summer recess, the fiscal follies will continue. In September, Congress will have only a few short weeks before fiscal year 2016 begins on October 1. The budget battles have mostly laid dormant for the past two years thanks to the agreement that was reached by Senator Patty Murray and Representative Paul Ryan, who were the respective Budget Committee chairs, to set the top line spending levels during this period. Even the last government shutdown was not really caused by a budgetary disagreement, but rather a policy fight waged over Obamacare. All the Ryan-Murray deal did though was postpone the budgetary pain into the future and the future is now.
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Discretionary spending has been relatively stable over the past three years at just over $1 trillion. Fiscal year 2016's spending cap will drop to $991 billion, split almost evenly between defense and non-defense programs. Many Republicans want to reduce spending on domestic programs even further to avoid defense cuts, although Democrats have consistently argued that any relief from the spending caps needs to be balanced between the two. While Congress could sidestep another shutdown by passing a measure ostensibly to extend current funding levels, the sequestration process would automatically impose blunt across-the-board cuts to meet the established cap. A new bipartisan deal could evolve under this fiscal pressure, but it is unlikely to fully stave off the austerity imposed by sequestration. Defense contractors are likely to feel the most pain in this case.
Essentially, the new Congress will continue to struggle with the same fiscal issues as the old Congress. And the markets will have to continue to endure the consequences.
Commentary by Stephen A. Myrow, managing partner of Beacon Policy Advisors LLC, an independent policy research firm based in Washington, DC, and served as Chief of Staff to Deputy Secretary of the Treasury Robert M. Kimmitt in 2008-2009. Follow him on Twitter @smyrow.