Analysis of House GOP’s Standoff Over Budget Deal Risks Economic Fallout

House Republican hardliners’ efforts to stonewall a budget deal ahead of a looming government shutdown could risk triggering automatic spending cuts later this spring that may put pressure on the U.S. economy’s already fraught recovery.

“The first funding deadline is Friday at midnight when several government agencies including agriculture, veterans affairs, and transportation, are due to run out of money. The second is next Friday, March 8, after which a full government shutdown would take effect if there is no funding resolution.”

President Joe Biden has a meeting Tuesday morning about the budget impasse with House Speaker Mike Johnson, R-La., Senate Majority Leader Chuck Schumer, D-N.Y., Senate Minority Leader Mitch McConnell, and House Minority Leader Hakeem Jeffries, D-N.Y.

“The Fiscal Responsibility Act, enacted in June of last year, mandated that if a permanent government budget was not in place by Jan. 1 of this year, then spending would automatically be cut by $4 billion on April 30, according to a Congressional Research Service analysis.”

“In addition to the topline number, there would be a mandatory shift in the share of funding allocated to defense and non-defense purposes. This would have the effect of automatically adding $33 billion to the non-defense spending column, and slicing $37 billion from the defense budget.”

House Freedom Caucus
Automatic spending cuts loom, threatening the broader economy’s fragile recovery.

“The government has been running solely on temporary spending bills since its fiscal year began in October, putting the FRA’s spending cut mandate in play.”

“The looming FRA cuts raise the stakes for the coming round of funding expiration dates.”

Capitol Hill is facing yet another week of government shutdown déjà vu. A full-year budget deal to avert the FRA cuts appears increasingly unlikely, amid staunch opposition from the House’s ultraconservative wing. The House Freedom Caucus, a coalition of hardline conservatives, has been actively working to derail a permanent budget deal.

Instead, they advocate for extending the current temporary spending resolution through the remainder of the fiscal year, thus ensuring that the Fiscal Responsibility Act’s (FRA) spending cuts are triggered on April 30. “Last Wednesday, the caucus sent a letter to Johnson, demanding he attach several hardline conservative policy provisions to any budget negotiations going forward.”

“The proposals, which include defunding Planned Parenthood, Biden’s ‘Green New Deal,’ and banning funding for DEI programs, would be dead on arrival in the Democrat-majority Senate, making them effectively ‘poison pills’ that would tank any budget deal in which they were included.”

“Johnson has previously rebuked continuing to fund the government with short-term bills.”

“However, he may ultimately cede to the Freedom Caucus to maintain his position and avoid the fate of his predecessor, former House Speaker Kevin McCarthy. McCarthy was the first speaker to be ousted from his post, an effort led by the Freedom Caucus after a dramatic episode also involving a near-miss government shutdown.”

“Senate leaders have warned the House to quit the political games and strike a deal on a full-year budget.” “‘As always, the task at hand will require that everyone rows in the same direction toward clean appropriations and away from poison pills,’ McConnell said Monday on the Senate floor.”

House Freedom Caucus
Fiscal stimulus at risk as GOP opposes full-year budget, sparking market concerns.

Government shutdowns tend to leave markets relatively unscathed. However, if the Fiscal Responsibility Act’s (FRA) automatic spending cuts take effect, they could significantly impact the broader economy’s fragile recovery.

“In order to have a soft landing in 2024, additional fiscal stimulus would be needed (such stimulus definitely kept the economy stronger, longer in 2023),” Piper Sandler Chief Global Economist Nancy Lazar wrote in a Monday note.

Lazar emphasized that government spending programs initiated under President Joe Biden, such as student loan forgiveness, tax cuts, and the CHIPS Act, have played a crucial role in bolstering the economy throughout its post-pandemic recovery. According to Lazar, these policies serve as fiscal tailwinds capable of enhancing business confidence.

“There could easily be an additional 1.5ppt boost to GDP from fiscal stimulus this year,” Lazar wrote. However, the House GOP’s opposition to a full-year budget could undermine this stimulus.

“The Congressional Budget Office estimated in January that extending the spending terms of the current short-term resolutions could ‘result in across-the-board reductions ranging from 5 percent to 9 percent for nondefense funding and from zero to 1 percent for defense funding.'” Failing to enact a full-year budget would also raise lingering questions about the government’s priorities, which are typically reflected in a long-term spending plan.

“It’s one thing to have short-term CRs so we have additional time to negotiate on a good faith basis…but it is another thing entirely to do a year-long, CR because we have no intention of doing our job,” Sen. Patty Murray, D-Wa., said in December.

“When we put our government on autopilot, we are telling the world Congress is asleep at the wheel.”

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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