FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

August 29, 2017

  1. Government Funding – A Federal Budget For Fiscal 2018
  2. President Trump’s Border Wall & Government Shutdown
  3. Lawmakers Must Increase the Debt Ceiling Just Ahead
  4. Chaos if Congress Doesn’t Raise the Debt Ceiling
  5. Children’s Health Insurance Program Set to Expire
  6. National Flood Insurance & FAA Funding to Expire

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Overview

Both houses of Congress return to Washington after Labor Day, following a ridiculous month-long recess, and members will be facing a boatload of “must-pass” legislation.  First, lawmakers face a September 30 deadline to pass a new federal spending budget for the next fiscal year to avoid a government shutdown.

Then, they'll have to grapple with raising the debt ceiling and preventing a default on the nation’s debt. Also, funds for numerous other critical government programs -- like the Children's Health Insurance Program (CHIP) that provides health insurance coverage for nine million low-income children -- are also set to expire on September 30 and need to be reauthorized and funded by Congress.

The problem with Congress not returning until September 5 (the day after Labor Day) is that it leaves only 12 working days when both houses of Congress are in session prior to September 30. There are serious concerns that there simply is not enough time to get all the must-pass legislation done ahead of the end of the fiscal year.

Thus, the threat of a government shutdown is very real this time around, especially in light of the heated divide between Republicans and Democrats -- and a president who last week said (stupidly!) that a government shutdown might not be a bad idea.

Whether you are a Democrat or a Republican, you need to know the challenges facing Congress in the very short time left before the end of the fiscal year on September 30. I’ll go through the list for you below. Let’s take them in order of importance.

Government Funding – A Federal Budget For Fiscal 2018

Congress must pass a new federal funding bill (budget) by September 30 to prevent a government shutdown on October 1, which is when fiscal year 2018 begins. In previous years, because politicians waited until the last moment to address difficult issues, lawmakers have opted to pass temporary “continuing resolutions” (CRs) to keep the government running at current spending levels for a few more months – in lieu of passing a new budget for the next 12 months.

Most budget experts and congressional aides look for Congress to follow that same pattern this year, likely punting the budget debate over 2018 funding until later this year – beyond the September 30 deadline.

Where Does Federal Spending Go? $3.8 Trillion in 2015

Government Funding

Source: Treasury Department

If lawmakers want to lift spending levels for the military and domestic programs like those within the Department of Homeland Security and the Department of Veterans Affairs, they'll have to pass a formal budget deal to raise the spending caps set by the 2011 Budget Control Act. Congress has twice raised these levels -- in 2013 and 2015.

President Trump’s Border Wall & Government Shutdown

I digress briefly here to address the issue of funding for President Trump’s controversial border wall. The president said last week (very stupidly in my opinion) that he would let the government shut down if the FY2018 federal budget doesn’t include funding for his border wall.

I’m not necessarily opposed to the border wall, but the president threatening to shut down the government if he doesn’t get his way on the border wall, is simply childish. The Democrats will never go along with, much less fund, a border wall. And it remains to be seen if there are enough Republicans to pass such funding. I doubt it. Trump has to know that.

In any event, a fight over border wall funding is more likely to play out in December when a more comprehensive negotiation over government spending could take place. A government shutdown is not necessarily out of the question, even though Republicans control the House, the Senate and the presidency.

Lawmakers Must Increase the Debt Ceiling Just Ahead

Lawmakers will also have to raise the debt ceiling by the end of September or early October as the national debt hits the structural limit. Treasury Secretary Steve Mnuchin has repeatedly pleaded with congressional leaders to pass a so-called “clean” increase in the debt ceiling – one with no other legislation attached to it. Yet Democrats and Republicans alike want to add some goodies onto the measure – either to increase spending or cut spending, etc.

The White House has signaled that it wants no drama surrounding this debt ceiling vote. The Office of Management and Budget Director Mick Mulvaney called for the “cleanest possible” debt limit increase earlier this month.

Government Funding

Source: Treasury Department

Congress might attach a clean debt limit increase to a continuing resolution (CR) and then suspend the debt ceiling for a few years, as it’s done in previous situations. Or it could suspend it for a few extra months to allow for a more comprehensive solution over the federal budget and debt beyond the September 30 deadline.

In any case, there will almost certainly be a big political fight over raising the debt limit. Lifting the debt ceiling is never as easy as it sounds. And the threat of a government default is always very unsettling to the markets.

Chaos if Congress Doesn’t Raise the Debt Ceiling

First off, no one knows exactly when the Treasury will run out of borrowing authority and have to cease paying some of the nation’s bills. The Congressional Budget Office and the Bipartisan Policy Center estimate that the so-called “X-date” will arrive sometime between October 1 and October 15. This is why lawmakers are being pressured to raise the debt limit by September 30.

Defaulting on any US legal obligations is a scary prospect without real precedent. Financial markets likely would plunge at least temporarily, and interest rates could spike higher (already happening, see below). If the impasse isn’t resolved quickly, the economy will suffer.

Government Funding

Source: Bloomberg

Absent action on the debt ceiling, the Bipartisan Policy Center calculates that the Treasury would fall short by $80 billion in October, meaning it couldn't pay 23% of all its bills for that month – assuming the X-date arrives early in the month.

Whenever the X-date arrives, the Bipartisan Policy Center warns: “On a day-to-day basis, handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, military active duty pay) would quickly become impossible.”

The choices facing Mnuchin would be unpalatable. In short, it would be CHAOS!

Children’s Health Insurance Program Set to Expire

Congress faces the same September 30 deadline to approve new legal authority and funding for the Children’s Health Insurance Program (CHIP). The

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