The battle over federal spending: GOP tactics may change but not the outcome

Shockwaves over the debacle to elect Kevin McCarthy (R-Calif.) House Speaker have dissipated by now, but the fallout from raising the federal debt ceiling this year is just beginning. According to the Washington Post, House Republicans are preparing an emergency plan that would prioritize spending if the debt ceiling is not increased. Last week, Treasury Secretary Janet Yellen announced that the department would take “extraordinary measures” in the meantime to continue paying the government’s obligations.

What is happening is a direct consequence of McCarthy making concessions to dissident Freedom Caucus members to become Speaker. They are irate over the $1.7 omnibus spending bill enacted in late December and insisted on rule changes to pass spending bills.

Henceforth, House members will vote separately on 12 appropriations bills –- a procedure called “regular order” that has been abandoned for two decades. They will also have 72 hours to review the pending legislation and offer amendments. In the end, McCarthy also agreed to allow a single member to file a “motion to vacate the chair,” which means he could be ousted if a vote is called and a handful of the rebels do not support him.

It is unclear, however, whether the rules changes will be effective. Andy Laperriere of Piper Sandler contends that the main reasons that regular order has been used only rarely are that the party fringes do not accept a compromise in a timely fashion and they believe delay gives them leverage to advance their budget priorities. In his view, the concessions McCarthy made set Republicans up for legislative defeats and will force moderate Republicans to take votes that will cost them politically.

Despite the philosophical commitment of Republicans to smaller government, federal spending has surged since the COVID-19 pandemic struck in 2020. Since then, $5 trillion have been allocated to provide pandemic relief for individuals and families, businesses, state and local governments and health care entities.  

In addition, legislation totaling about $1.2 trillion was enacted to increase public infrastructure spending and to tackle climate change and enhance social programs. Amid this, the federal budget deficit as a percentage of GDP spiked to post-war record highs.

The determination of Republicans to curb federal spending is not new. Daniel Henninger of the Wall Street Journal has documented the attempts to rein in spending over the past 50 years to little or no avail. He believes controlling federal spending is impossible unless Congress is subject to an external force. One of the most effective ways would be to restore line-item vetoes by the president. But this is not something President Biden embraced as he embarked on the most ambitious social agenda since LBJ’s Great Society.

A further obstacle is the growth of entitlement programs such as Social Security, Medicare and Medicaid. Mandatory programs represent 70 percent of total spending, while discretionary spending accounts for 30 percent. One concession that McCarthy made was to cap discretionary spending at Fiscal Year (FY) 2022 levels. This would entail cuts for most programs, because discretionary spending then was $174 billion below what Congress appropriated for FY23. If defense spending is kept at FY23 levels, it would require non-defense spending to be cut by 22 percent, which is a non-starter for Democrats.

The biggest impediment to cutting federal spending is voters, most of whom like the benefits they receive from the federal government but do not relish paying for them.

Ronald Reagan realized this when he ran for president in 1980. He understood that policies to spur economic growth and jobs via large tax cuts for individuals and corporations had greater appeal to voters than traditional Republican attempts to rein in budget deficits. During his eight-year tenure, federal spending grew by nearly 70 percent. Although federal deficits surged to record levels then, many voters did not care and some concluded that deficits do not matter.

Donald Trump pursued a similar strategy when he ran for president in 2016. His primary legislative victory was passage of the Tax Cuts and Jobs Act at the end of his first year in office. During his four-year tenure, federal spending rose by more than 80 percent, with the biggest increases occurring after the COVID-19 pandemic struck.

The challenge for House Republicans is how voters will react if programs they count on are pared back. As reported by the Washington Post, the plan they are weighing would call on the Biden administration to make only the most critical payments if the statutory limit on what the Treasury can borrow is breeched. Thus, items such as payments for interest on the debt, Social Security, Medicare, Veteran benefits and defense spending would be made while others would not.

However, when similar ideas were floated in 2011 and 2013, officials in the Obama administration ruled that prioritizing payments was not feasible given the complexity of the millions of payments that are made daily.

The biggest risk Republicans face this time is that the economy could be in recession by mid-year, and they would be blamed for worsening the situation. In the end, the most likely outcome is that Republicans will not allow the U.S. government to default on its debt and imperil the debt rating of U.S. Treasuries. They are more likely to settle for slowing federal spending in the fiscal 2024 budget. Thereafter, the storm and fury over the budget is likely to wane as campaigning for the 2024 elections gets underway.

Nicholas Sargen, Ph.D., is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has written three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”