Trump & Democrats Reach Budget Deal, Suspend Debt Ceiling
IN THIS ISSUE:
1. Lawmakers Reach Surprise Budget/Debt Ceiling Deal
2. So, What’s in the New Budget/Debt Ceiling Deal?
3. What Else You Need to Know About the Budget Deal
4. Conclusions: It’s “Same Old, Same Old” in Washington
I wrote most of this E-Letter over the weekend and finished it yesterday morning. In it, I predicted that the ongoing political battle over raising the debt ceiling would continue until the last minute – sometime in September or October – when the government would run out of money and risk a dangerous default on its debt. In recent years, that’s what almost always happened.
Yet late yesterday afternoon – after my E-Letter had been proofed and was all ready to send – news broke that President Trump and congressional leaders struck a surprise deal to not only finalize a two-year federal budget but also to suspend the debt ceiling until July 2021.
Whenever I write my E-Letter or Blog in advance, and make predictions, I run the risk that something unexpected will happen, and I’ll be wrong and have to rewrite the piece all over. It doesn’t happen often, but in this case, I had to start all over at the last minute. I started rewriting it at about 6:00 last night. Scramble time!
Rather than switch to an entirely different topic at the last minute, I’ll summarize the highlights of this unexpected and highly unlikely agreement between President Trump, Speaker Pelosi and other congressional leaders, which was tentatively struck late yesterday. It still must be voted on, but it looks likely to pass – despite the fact that it increases federal spending significantly.
Lawmakers Reach Surprise Budget/Debt Ceiling Deal
President Trump announced late Monday afternoon that he had reached a deal with House Speaker Nancy Pelosi and other congressional leaders for a new federal budget to raise spending on both defense and non-defense programs over the next two years – and to suspend the nation’s debt ceiling for the same period.
If this new deal is passed, the agreement would avoid steep automatic spending cuts set to take effect for fiscal year 2020 and defuse the threat of a possible debt ceiling default. Immediately after the deal was struck, President Trump tweeted:
“I am pleased to announce that a deal has been struck with Senate Majority Leader Mitch McConnell, Senate Minority Leader Charles E. Schumer, Speaker of the House Nancy Pelosi, and House Minority Leader Kevin McCarthy — on a two-year Budget and Debt Ceiling, with no poison pills. This was a real compromise to give another big victory to our Great Military and Vets!”
Trump and Republicans can point to another two years of increased defense spending, while Pelosi and her caucus can say they protected the domestic programs they prioritize – which will also see spending increases over the next two years. And both sides can breathe a sigh of relief about avoiding a debt ceiling crisis that could have shaken markets and the economy just ahead.
Yet the deal will likely face stiff pushback from fiscal conservatives, as well as from Democrats angered over some concessions made by Pelosi and party leaders. But if it passes, it will amount to an against-the-odds victory for Trump and Pelosi and avoid a politically dangerous situation had we hit the debt ceiling just ahead.
So, What’s in the New Budget/Debt Ceiling Deal?
According to the initial reports from the White House and Speaker Pelosi, here are the highlights from yesterday’s preliminary agreement:
- Suspend the debt ceiling through at least July 31, 2021.
- Lift spending levels over the next two years by about $320 billion. That total is $30 billion less than Democrats reportedly had wanted, but it does achieve their desired goal of providing equal-sized increases for defense and non-defense outlays.
- Domestic programs would on average receive 4% increases in the first year of the pact. Meanwhile, defense spending would jump to $738 billion next year, a 3% hike. But if you look at the new deal over two years, the annual spending increases are roughly the same as adjusting actual 2019 spending for today’s low levels of inflation.
- Allow the decade-long spending caps enacted in the 2011 Budget Control Act to expire. Those caps, meant as an enforcement mechanism for a deficit-reduction deal, were lifted repeatedly over the following years as lawmakers found they couldn’t stomach the required “sequestration” cuts. This would be the fourth deal since 2013 to bust through the spending caps.
House Democrats hope to pass the deal before they adjourn for a six-week recess on Friday, setting up the Senate to pass the legislation before it departs at the end of next week.
What Else You Need to Know About the Budget Deal
Fiscal hawks are apoplectic. The Congressional Budget Office (CBO) reported earlier this month that annual budget deficits are rapidly rising toward $1 trillion starting next year and for the foreseeable future. The federal government must borrow a quarter for every dollar it spends, according to the CBO.
The spending levels in this new deal would only accelerate that climb, adding about $2 trillion to projected debt levels over the next decade. “This agreement is a total abdication of fiscal responsibility by Congress and the President,” warned the Committee for a Responsible Federal Budget. “It may end up being the worst budget agreement in our nation’s history, proposed at a time when our fiscal conditions are already precarious,” it added.
Trump’s support is critical. Some Senate and House conservatives are calling on Trump to reject the deal. Lawmakers know that he hasn’t officially signed off until he actually puts pen to paper. They know that in the past Trump has backed out of such bipartisan agreements.
Yet after the agreement was announced late yesterday, President Trump said, “It’s very important that we take care of our military. Our military was depleted. In the last two-and-a-half years, we’ve un-depleted it, OK, to put it mildly. We need another big year.”
He has told aides that he plans to have a fight with Congress over reducing spending if he wins reelection, according to the Washington Post, but he’s backing this budget deal – and the strength of his support will be key to lining up GOP votes.
Democrats may be taking a risk, too. Bloomberg’s Sahil Kapur noted that the deal could come back to bite Democrats if they defeat Trump in the 2020 elections. He tweeted late yesterday, “If Democrats win [in 2020], this may force the next president to spend their first six months battling a storm of debt mania, which Republicans historically ignite when they're out of the White House.” That’s an interesting thought.
Democrats can’t resort to “poison pills.” Trump demanded assurances from Pelosi that coming spending bills won’t contain controversial poison pills, meaning Democrats can’t try to eliminate the Hyde Amendment, which prohibits the use of federal funds for abortion, or place additional limits on the administration’s ability to transfer money for construction of a border wall. Many Democrats won’t be happy about that, so we’ll see what happens.
Lawmakers still have work to do. Congressional leaders still must line up the votes to ensure this new budget deal passes. Assuming it does, lawmakers will then need to pass spending bills – including the contentious legislation to fund the Department of Homeland Security – before the end of September.
Conclusions: It’s the “Same Old, Same Old” in Washington
Yesterday’s preliminary deal to enact a two-year federal budget deal and suspend the debt ceiling came as a huge surprise. It was reported that President Trump was determined to get a major deal done before Congress leaves town for its August recess this Friday.
The White House said the president pushed lawmakers very hard and compromised repeatedly to avoid a debt ceiling crisis looming as early as mid-September. Arguably, it’s a good thing we have a new two-year budget, and the debt ceiling nightmare is pushed out to July 31, 2021 – thus avoiding a potential financial crisis just ahead.
But really, it’s the “same old, same old” in Washington. Spending goes up year after year. Ditto for the budget deficits, which will be $1 trillion or more a year indefinitely, according to the latest CBO projections. Our national debt will approach $35 trillion a decade from now – that is if the system doesn’t blow up before then – which I feel is highly likely.
As I wrote in my blog last Thursday, the question is: How much longer can this borrowing binge continue? No one knows, of course, but it will reverse itself at some point. The problem is by the time it is obvious that the borrowing binge has reversed, it may well be too late to do anything about it.
So, with respect to out-of-control spending and the national debt, this new budget deal is a disaster. I wish I could end on a brighter note, but unfortunately, it is what it is.
Gary D. Halbert
Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.