The House of Representatives has enacted a measure to suspend the debt ceiling for 90 days, through May 19. It also attempted to revitalize the budget process by making members' salaries in both the House and Senate contingent upon passing a competing budget blueprint by April 15. Despite White House endorsement of the temporary measure Tuesday, Democrats were uniformly critical on the floor this morning, forcing Republicans to deliver 199 votes for enactment, in contrast to 111 opposing votes from the minority.
The event was positive for investors for several reasons.
It will defuse the most nuclear of tools to force action on the deficit, i.e., the threat of disrupted federal payments or U.S. government default via a failure to extend the current $16.4 trillion debt ceiling. But just as notable has been House Republicans' effectiveness in goading Senate Democrats back toward regular order and the timeworn budget process. The associated timelines and procedural rules could prove helpful not only in forcing the two sides to define positions and clarify differences, but also to provide tools to facilitate enactment of a deficit reduction deal this summer or fall. Another plus could be stabilization of the Republicans' hand, which has suffered amid perceived disunity, weak messaging and setbacks associated with the ultimate fix for the fiscal cliff, the American Taxpayer Relief Act (ATRA).
What Does the House Republicans' Debt Ceiling Bill Say?
The No Budget No Pay Act (H.R. 325) extends the timeframe for the Treasury Department's debt issuances with a somewhat elastic dollar-level allowance, running through May 18, 2013. While not delineating a nominal cap, the bill nevertheless guards against the Treasury's jamming through proactive debt issuances within the three-month time window, specifying that: "An obligation shall not be taken into account under paragraph (1) unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013."
The bill also includes well-reported language making House and Senate paychecks dependent upon each passing a budget resolution. If a "House of Congress" fails to adopt a spending and revenue blueprint before April 15, as required by the Congressional Budget Act, Senators' wages will be held in escrow. The same will be true with regard to the House. If either chamber fails to deliver, salaries can only be recovered from escrow once they pass a budget. [Despite H.R. 325's reference to the test of each chamber's producing a "concurrent budget resolution," which connotes action on both sides of the Capitol, it still would require members in each chamber at least to pass competing budget blueprints in order to be absolved. The House has done so faithfully in the past; the Senate has not since April 2009.]
Will the House Language Pass in the Senate?
Apparently, yes, per high-level sources, given the White House endorsement late Tuesday and the modest success of Republicans' populist theme about members not being paid for dereliction of duty.
What Does It Mean?
While Hill Democrats and liberal pundits have criticized the temporary scope of the proposal, and prospects are unclear for passage of subsequent measures this spring or summer, the result is positive for three reasons.
First, by prompting the Democratic Senate to produce a budget resolution, it increases the odds that Congress might pursue deficit reduction via regular order and under the process constraints of the Congressional Budget Act. This would return focus to the legally established process for committee and floor votes this spring, plus other mechanisms that could expedite agreement on a deal.
Second, should Senate Democrats pass a resolution and adhere to the traditional budget process, associated use of the reconciliation process could facilitate Senate floor passage of entitlement and tax legislation with a simple majority, or 51 votes, rather than face a filibuster requiring the far higher hurdle of 60 votes for enactment.
Finally, today's shift in GOP strategy could also help the party regain bargaining traction after seemingly losing ground in the November elections and subsequent messaging battles over the higher marginal income tax rates accompanying Congress's fix for the fiscal cliff. This is no small deal -- and it did not come without risk given the party's recent dalliance with moving beyond the Boehner and Hastert rules, which seek to force dollar-for-dollar spending-cut offsets for debt limit hikes and to preclude measures being brought to the House floor without support of a majority of Republicans.
I still expect the 2013 chapter of Washington's fiscal policy face-off to largely be written in March and April, when the need to head off the 2013 budget sequester and fund the government after March 27 might force across-the-board spending cuts in defense and non-defense discretionary programs, if not a government shutdown by early April.
The significance of the House GOP's gambit in passing H.R.325, temporarily suspending the The Boehner Rule by not requiring offsets, may be in activating the budget and reconciliation processes for potential employment should spending-and-sequester-related "March Madness" ultimately force the two sides to compromise on a mini grand bargain this spring or summer. I see major turbulence along the way, however. Such an agreement would assume savings from both mandatory and entitlement spending cuts, which Democrats have resisted, and additional revenues, which Republicans have newly dismissed in the wake of being forced to agree to $600 billion in upper-income tax hikes associated with ATRA. Meanwhile, this calm before the storm only reinforces the view that investors' seeking to trade the coming D.C. turbulence might miss the best gains of the year.