News emerged late Wednesday that the House had passed debt-limit legislation forged by President Joe Biden and House Speaker Kevin McCarthy that would impose restraints on government spending through the 2024 election and avert a destabilizing U.S. default.
A majority of lawmakers from both parties approved the bill in a 314-177 vote, sending the measure to the Senate for consideration as the June 5 default deadline declared by Treasury Department leadership draws near.
According to Greg Valliere, chief U.S. policy strategist at AGF Investments, the bipartisan house vote represents a "remarkable" compromise, but he also remains concerned about what will happen now in the Senate. He warns that a default remains "very possible."
Debt Deal Is Closer, but Not Finished Yet
"The remarkable House votes this week should have ended the debt ceiling crisis, but nothing in Washington is quite that simple," Valliere warns in new commentary on the AGF website. "The drama now shifts to the Senate, where angry opponents of the bill may push for amendments in the next few days."
Valliere says this possibility raises a mind-boggling potential twist: Could Washington still run out of money by the June 5 default deadline even with a deal that effectively sailed through the House and enjoys widespread support in the Senate?
To be clear, Valliere says, the proponents of the Biden-McCarthy deal have the votes to pass it. But in the "bizarre world of Senate rules," even one member can object to a bill, he warns, potentially tying it up for as long as a week.
According to Valliere, all eyes will be on the Senate's "noisy dissidents" in the coming days, among them Lindsey Graham of South Carolina and Rand Paul of Kentucky. Another objection could come from Tim Kaine, a Virginia Democrat, who wants to strip special approval of a new pipeline from the bill.
Why a Delay Could Be Serious Business
As Valliere points out, the Treasury's cash balance fell to just $37.4 billion on Tuesday, and as such, budget experts believe the June 5 default date is "very real."
"If there's no Senate deal by Monday, the Treasury Department would have to scramble," Valliere says. The debt managers might then tap into the trust funds for highways or Social Security, "selling bonds to avoid default and then buying them back once the Senate passes the bill."
While that would avoid default, Valliere says, a serious question could arise: Would this be the last straw for the credit agencies, which could downgrade U.S. debt ratings?
As Valliere recalls, Standard and Poor's downgraded U.S. debt in 2011 after passage of a deal to avoid default, and the same thing could happen again. While not as catastrophic an event as an outright no-deal default, such a downgrade could increase future borrowing costs.
How Social Security Could Lose Out
While the proposed limits on food assistance programs and the lack of a new work requirement for Medicaid recipients may be getting most of the attention from the general public amid the ongoing debt ceiling debate in Congress, one element of the deal is raising the ire of retirement industry experts for its roundabout potential to harm the Social Security program.
Specifically, experts like the Social Security League's Mary Johnson and Boston University's Laurence Kotlikoff are raising the alarm about the deal's treatment of funding for the Internal Revenue Service, and the possibility that the already resourced-strapped agency will have to endure substantial budget cuts in the years ahead.
Their fears for Social Security are based on the fact that the retirement income insurance program is funded by tax revenues. With fewer resources to employ IRS agents and to conduct audit activities, they warn, there is a real chance that the Social Security program will miss out on future revenues that it would otherwise have been able to expect.
As the experts warn, the Social Security program is already on track to see its main trust fund used to pay retirement benefits go bust in the early to mid-2030s, and any reduction in anticipated revenue going to the program will just deepen and accelerate the insolvency issue.
