The Biden Administration and the Speaker of the House have claimed that they have come to an agreement to increase the debt ceiling.
It’s trash, of course.
We’re going to dive into the initial text of the bill, and then what this means for markets moving forwards.
Table of Contents
The Background
The Bill
Discretionary Spending Cut
Burn Pit Exposure Fund Cut
PayGo and Congressional Budgetary Controls
Rescinding CoVID, Disaster and Emergency Allocations
IRS Funding Rescinded
Student Loan Repayments Restarting
Welfare Work Requirements
Permitting Reform
Timing
Will it Pass?
Market Impacts
Conclusion
Internal References
1. The BackGround
We’ve spent the last 5 and a half months with the US government having reached its debt limit. This meant that the treasury could not sell treasury bonds to cover spending in excess of tax revenue. In that time, the Treasury has been spending its TGA (Treasury General Account), this account gets refilled when quarterly tax payments are made, as well as when annual tax payments are made, it was refilled to some extent 3 times in this period, and was set to receive another quarterly tax payment on 6/15/2023.
The US legislature is the branch of government that authorizes spending and debt. They also are the ones who control the debt limit. Currently, the Republicans narrowly control the House, and the Democrats narrowly control the Senate. For any debt deal to pass, both parties have to agree to a debt limit bill.
The Freedom Caucus, a faction within the Republican Party, had exercised a bit of control over the Republican Speaker of the House vote and refused to vote for the Republican’s pick of Congressman McCarthy. After over a dozen votes, he was inevitably selected after offering several concessions to the Freedom Caucus. The ridiculous national debt was one issue for the Freedom Caucus, and likely was one agreement that McCarthy made, another agreement was that at any point they could freely vote him out of his position as Speaker.
Over the holiday weekend, we hit what I had pessimistically expected would happen, McCarthy gave up his token resistance despite holding all of the cards.
I’m going to take this time to make another prediction. As discussed in section 3, the usage of the TGA and the realities of 2022’s tax revenues will likely force the US legislature to approve a debt ceiling increase in the Spring after the current token resistance of the republican party ends.
McCarthy is looking like the kind of negotiator that you couldn’t even trust to sell a car on Craigslist without getting talked down off of the sales price.
It’s quite likely that McCarthy has convinced enough RINOs to sign off on this embarrassment of a bill, and he’s retreated or outright surrendered on enough points (while getting nothing in return) that the Democrat vote is likely to go along with this bill.
US Treasury Secretary Janet Yellen spent most of this past month trying to scare Republicans into thinking the US would run out of money in less than a week, but whether that was true or not is unknown (but we’ll guess anyways).
Looking at the TGA, they have about 10-13 days of money (gets them to about 6/7) at the current burn rate. However, they have a quarterly tax payment coming on 6/15, so they only really need to make it to 6/12 and then they could push all the way to the end of the month, where they could then start extraordinary measures (delaying deposits into certain pension and retirement accounts) and likely have enough money to make it all the way until mid-July before running into a true drop-dead date.
But we’ll never see if they could make it or not, because McCarthy folded and gave the Biden administration unlimited spending until his current term is over. It’s a white flag. Embarrassing.
So what’s in this bill? Thankfully, it’s only 99 pages; I’ve read the whole thing and will be outlining the important bits in Section 2, let’s dig in.
2. The Bill
The bill in its entirety is available here.
In an act of utter irony, they have named the bill “The Fiscal Responsibility Act of 2023.”
In what can only be defined as an act of pure responsibility they will be suspending the debt ceiling until January 1st, 2025. Meaning they can spend as much as they want for the next 18 months. So we can safely assume that by 2025, the debt will have ballooned from $32 trillion to ~$36 trillion or so.
Discretionary Spending Cut
First, we have a cut to discretionary spending. Discretionary spending in this case means spending that Congress spends through an appropriations process with an appropriations bill. An example of such would be the Ukraine spending appropriation bills we investigated last year.
In FY 2022 (October 1st 2021 - September 30th 2022), Congress spent $1.7 trillion in discretionary spending. The “Fiscal Responsibility Act” will cut this number down to $1.62t in FY 2024, and $1.63t in FY 2025 with 1% annual increases beyond that. This saves about $70b a year.
Burn Pit Exposure Fund Cut
This section also includes other cuts to spending in a number of bills. One of which is a $14.7 billion cut to funding for Veterans exposed to the burn pits in Iraq and Afghanistan.
On it’s face, this looks bad, but I have to question where all of this money was going. For those curious for background, during the GWOT (Global War on Terror) it was common practice to dispose of most trash through burn pits (why?) and ~3.5 million veterans from the armed forces were exposed to consistent particulate matter from these burn pits during their deployments. Depending on what was burned, there has been a significantly increased risk for this group to develop a number of cancers, chronic respiratory diseases, and throat/neck tumors.
Initially, Democrats were trying to cut VA spending by $4 billion. Republicans managed to keep total spending for the VA unchanged, but to do so they had to cut from some areas of VA spending and increase spending in other areas of the VA. This seems to have been the big casualty.
Any military veteran can tell you that the VA is inefficient and tends to do as much as it can to not pay benefits. Most veterans are mistreated by the VA, if they’re even treated at all.
Tyler Ziegel is an example, he was severely injured in a suicide bombing in Iraq in 2004. He spent nearly 2 years in the hospital before finally getting out. The VA was supposed to pay him $4,000 a month in disability due to his injuries received while serving. The VA quietly cut his payment down to $2,700 a month, and if not for national media attention, he never would have gotten the money he was owed. But by that time, his wife had divorced him, and certain things can’t be undone once they’ve been done. How many more veterans like him have been suffering in silence? Tyler passed away a few years after that due to an overdose of alcohol and morphine.
Rest in Peace.
What would the VA do with more money? Is all of this money even getting to the veterans? Or is it all just lost in an administrative morass? Who can say? I don’t know what to make of a $14 billion cut (over 6 years) to the burn pit bill. Was it even getting to our veterans in the first place?
Memorial day is a holiday about remembrance, but a political class that would rather forget the purpose of such a holiday likely does so from a guilty conscience.
PayGo and Congressional Budgetary Controls
The bill enacts PayGo for all non-discretionary spending.
Essentially if any executive department wants to undertake an action that will increase spending, they must similarly increase revenue to offset the spending increase.
Whether the administration cares to even follow this law or not remains to be seen. The Legislature has so far been toothless to enforce any of the powers reserved for it as we’ve seen from an SEC that both flouts court orders and ignores congressional authority.
But in general, PayGo exists to stop spending increases that are not voted on by the legislature. We’ll see if they can enforce it, or if it’s going to be like everything else the legislature has enacted that goes wholly ignored by the Executive branch of the government.
Rescinding CoVID, Disaster, and Emergency Allocations
Starting on Page 33, line 14, a number of emergency bills are named and the remaining funds that have not been spent/allocated are rescinded. Most of these bills were emergency spending allocations made for specific past natural disasters, the CovID pandemic, etc. The remaining money likely would never have been spent anyways and this is essentially an accounting action that at least stops that money from being deceptively re-allocated to something else in the future.
This included grants for airports, museums, aid for services deemed “essential” during the pandemic, migrant and refugee assistance for crises gone by, aid bills for Sudan from a decade ago, grants to bring broadband internet to rural communities 15 years ago, Native American programs that ended 50 years ago, etc.
They really scrimped and scraped around for allocated but unspent money in every corner they could find to rescind it and see what they could come up with. It’s kind of like when you find out you had an extra paycheck from your job in high school and get your $238 10 years later from a state website. It’s your money, it’s just been sitting somewhere, unused for decades. You might feel like you’ve found new money, and in some sense you have, but in reality, nothing has actually changed and you’re just undoing a mistake from your own past.
This goes on for 20 pages.
IRS Funding Rescinded
Probably the first good thing in this bill. The funding that was recently allocated for the IRS to hire additional agents to increase tax enforcement on middle-class and lower-class taxpayers was rescinded.
Kind of.
There was an $80 billion cut, but this was for money over the next 10 years. Realistically the IRS can change nothing, and the money will run out ~2027 instead of 2033, but if a new funding bill is passed for the IRS between now and then, nothing will change at all for them.
Student Loan Repayments Restarting
The suspension on payments of federal student loans is ending.
On August 29th, 2023 student loan payments will resume. Everyone with student loan debt will suddenly feel a couple hundred dollars poorer each month. This will have a significant impact on the economy and consumer spending.
Welfare Work Requirements
Recipients for certain types of welfare will have it decreased if they refuse to work without a good reason or qualifying disability.
In practice, this sounds good. But read in its entirety, the legislature only gets to choose 5 states at most to be subject to this. They’ll get one year to observe what portion of welfare recipients can work but refuse to, and then these 5 states will be given a benchmark rate for what portion of their current welfare recipients can work but won’t and must have a means for reducing assistance for these families. If the 5 states can’t manage to reduce these numbers, they will lose a portion of the funding they receive for welfare spending.
The pilot program will last for 6 years. A lot can happen in 6 years. The legislature can change, bills can be revised or rescinded. Nothing is permanent. It’s unlikely that this will lead to any lasting change to current US welfare programs as it’s quite likely that the legislature will at some point revise this law before the pilot program for whichever 5 states get chosen ends. But at least they’re trying to cut spending here.
Starting on Page 67, Line 13 modifications are made to qualifications for Food Stamps.
While the homeless, veterans, and adults under 24 who were in foster care all now qualify for food stamps where they previously didn’t; it raises the age at which able-bodied adults can qualify for food stamps without working.
Essentially, if you are able-bodied you must work at least part-time if under 53 in FY 2024 and under 55 in FY 2025 to qualify for Food Stamps, on top of being low-income. Past that age, there is no longer a work requirement. Currently, that work requirement sits at 49 years old. If you do not work but can work, you can still receive food stamps for a 3-month period, every 3 years.
It’s unclear what if any impact this will have on the number of food stamp recipients, but there is no reason to be subsidizing people with no disabilities in this manner, so this is a positive change in my opinion.
Permitting Reform
In my past life, I was a project development manager for utility-scale renewable energy infrastructure in the US, and this section impacts my past life. Large-scale projects are all subject to reviews for compliance with the National Environmental Policy Act (NEPA) as well as consultations with the National Marine Fisheries Service (NMFS) and the U. S. Fish and Wildlife Service (FWS) under the Endangered Species Act (ESA), the Magnuson-Stevens Fishery Conservation and Management Act (MSA), the National Historic Preservation Act (NHPA), and the Clean Waters Act (CWA). Those are the ones I remember off the top of my head, but I’m sure that I’m forgetting several others.
That list may sound onerous but it really wasn’t because the rigor of these compliance reviews would depend on your project location. You might have 3 or 4 tough ones for a specific project, while the rest are just cursory reviews. So long as your environmental consultants weren’t dog-shit they could give you a good idea of what to expect and whether it would just be a quick informal meeting and rubber stamp at the FWS office, or if you’d be making material modifications to your construction plan because the collapsed structure along your transmission route is actually the remains of an original homestead that’s over 180 years old and the only way to avoid a significant review with the NHPA is to route your transmission lines a half a mile around it for an extra $3.5 million of project costs (true story).
So even though I never personally found the compliance reviews to be too onerous, they were still a bit of a pain, and you never truly knew you were going to satisfy your lenders enough for them to release the funds until the last minute. Once they feel comfortable enough to lend us the money it essentially becomes their problem if we failed to comply with existing legislation and I got to stop worrying about it, but so far none of my projects have failed compliance yet even after so many years have passed.
This bill will limit regulatory review to just one lead agency that the industry will have to contact and one document instead of multiple. Environmental Impact Statements (EIS) will be limited to 150 pages, but projects of extraordinary complexity could extend up to 300 pages.
Environmental Reviews will be limited to 1 year and EISs will be limited to 2 years.
Personally, I’m not sure how I feel about this. Certain agencies are far slower than other agencies. I’m not sure if I want the EPA dealing with the ACoE on our behalf when I could just manage both contacts myself. But then again, the 1-year and 2-year deadlines might mean that it’s not a big concern since most Environmental Reviews take about 1 year anyways.
For significantly complex environmental impacts like nuclear and large-scale natural gas/coal projects, this is probably a godsend. One of the big problems with legislation is that if government agencies can’t sufficiently answer questions for themselves (disposal of spent nuclear fuel), they will sometimes just stonewall and delay the process driving up costs until the funding behind the project eventually dies. I saw this happen to a few wind projects (none of mine), and suspect it’s been one of a number of issues stopping nuclear development in the US.
On Page 95, Line 8; Congress is also approving the permitting for the Mountain Valley Pipeline in this bill. This is a Natural Gas pipeline delivering Natural gas from West Virginia South East into Virginia where it meets distribution lines taking this gas further South.
I don’t know anything about this pipeline so I have no comment. I’m a bit surprised to see a specific project in here though. I’m sure a few of my friends at NextEra probably had a nice day at the office on Tuesday when they saw their project made it into the current version of the debt bill.
3. Timing
The US House is scheduled to vote on the Fiscal Responsibility Act of 2023 on Wednesday 5/31/2023 at 7:30 pm CST. The results of that vote should be visible on the bill’s page on the Congressional Website.
If it passes the House with a simple majority, it then gets to go to the Democratic Senate a few days afterward. After passing the Senate with a simple majority, then it would go to Joe Biden’s desk where he could either sign the bill or veto it.
But in my opinion, the House is the only real hurdle in this mess. If it gets enough Republican votes to backstab the freedom caucus, then it will have no problem passing the Democratic Senate, and this bill has already gotten Biden’s blessing so it could likely go into effect within ~10 days or so from now.
4. Will It Pass?
The Freedom Caucus is livid, of course, they’re the only ones who care about stopping inflation, which in the current American economy only comes from one place (government spending money it doesn’t have).
They’ve been stabbed in the back as I figured they eventually would be. I’m disappointed too, but not terribly surprised. Nothing gets fixed until basically every member of the Republican Party gets replaced. We’ve replaced ~50 at the Federal level and quite a few at the state level, but we have a long way to go.
There are 46 members of the Freedom Caucus in the House, we can assume they will all vote no on the bill. We also got an unlikely ally from Lindsay Graham who was mad that there wasn’t more Ukraine spending in the bill and will oppose it… for that reason.
There are 435 members in the House of Representatives. A simple majority requires 218 yes votes. There are currently 222 Republicans and 213 Democrats in the House.
McCarthy promised to deliver 150 Republican Yes Votes in the House to Biden. He’s already down to 188 without the Freedom Caucus, but beyond them, quite a few other Republicans have already come out against the bill, and it’s possible that he will lose even more of them. Some Democrats in the House have also come out against the bill, with the Congressional Progressive Caucus member Greg Casar (D-TX, lol Austin) stating:
Some Democrats will vote yes to get the deal done so default will be avoided. And then progressives, including me - many are leaning no because we have to hold the line against people getting screwed, getting kicked off of vital food programs, getting kicked off of their childcare assistance, losing health care or losing housing.
It’s certainly within the realm of possibility that the bill fails to receive enough support, but I’m not going to hold my breath too much. I have “kicked puppy syndrome,” when it comes to political solutions to societal problems and I expect the bill to pass.
If it does pass, McCarthy’s position will probably be threatened, as one of the new rules adopted when he was made Speaker of the House is that anyone at any time can call a resolution to remove him. Some in the Freedom Caucus are already threatening to do exactly this after the vote tonight.
Under the newly adopted rule, any single member of the House could “offer a privileged resolution declaring the Office of Speaker vacant.” The term “privileged” here refers to a matter that has precedence over regular House business, meaning it is more urgent and must be brought to the House floor for a vote.
This is not confined to Republican members; Democrats could make the motion to vacate as well.
Procedural votes could be offered to slow down the motion, but when it does come to the floor, it would need only a simple majority of the House — or 218 members currently — to pass.
In theory, a small group of Republicans who want to force out the speaker could work with Democrats to reach the votes needed to remove the speaker.
Regardless of how the vote turns out, he should lose his job over this.
We’ll see.
5. Market Impacts
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