During yesterday’s White House meeting between President Biden and the “Big Four” leaders of Congress, the President agreed to Speaker McCarthy’s ask that they enter into one-on-one negotiations and limit the number of people in the room going forward. This was the natural progression of talks and represents the start of more serious negotiations.
As such, the President designated Senior Advisor Steve Ricchetti and OMB Director Shalanda Young as his two lead negotiators. Speaker McCarthy tapped Congressman Garret Graves (LA-06) and members of his staff to serve as his proxy. The Speaker’s staff will include Deputy Chief of Staff John Leganski and Policy Director Brittan Specht, as well as Senior Policy Advisor Jason Yaworske, an appropriations and budget specialist.
Though little progress has been made to date, the appointment of these individuals to the negotiating room represents a positive development. Ricchetti enjoys a close relationship with the President and a history of congressional dealmaking. Young has deep contacts on the Hill—particularly on the House side—from her time as staff director of the House Appropriations Committee and displays a mastery of the Federal budget.
Meanwhile, Congressman Graves has emerged as one of the most important mediators and policy influencers within the House Republican Conference. He has served in a similar role throughout the year, helping to deliver the speakership for McCarthy and brokering a Republican debt limit proposal between the “Five Families” of House Republicans (Freedom Caucus, Governance Group, Mainstreet Caucus, Problem Solvers Caucus, Republican Study Committee). Within the Speaker’s staff, John Leganski acts as the architect for McCarthy’s short- and long-term strategies, including crafting of the “Commitment to America” and the campaign to become Speaker. Brittan Specht heads the Speaker’s policy team, and he and Jason Yaworske bring top-level conservative spending and revenue background to the table.
In short, this is the right group to be negotiating between the two principals who need to cut a deal. Congressman Graves has already been in touch with Members from the Five Families and we expect him to bring their redlines to the table as discussions kick off this morning. Below are the parameters of what we believe the debt limit deal will ultimately include.
FY24 Topline Spending
This will be the first—and most important—item to be agreed upon. Without it, talks cannot progress. The starting Republican position is a discretionary spending level for Fiscal Year 2024 that equates to the FY22 level. This is a non-starter for Democrats. As such, we believe a topline for FY24 will land somewhere between FY22 and FY23 levels. How close it is to either will depend on the overall Defense spending number. Negotiators will leave the spending levels of each of the 12 annual bills to the Appropriators, but they must hammer out the breakdown between Defense and non-Defense spending.
Discretionary Spending Caps
Once an FY24 number is agreed to (including the breakdown between Defense and non-Defense), negotiators will move to the question of spending caps in the outyears. This will most likely be tied to how long the debt limit increase is. House Republicans provided for a debt limit increase of one year in their proposal. This is a non-starter for Democrats. Democrats will want an increase of at least two years to ensure that President Biden does not have to enter into negotiations again prior to the 2024 presidential election. While Democrats would ideally like to eliminate the debt ceiling permanently, that is a non-starter for Republicans who view this authority as an important tool to reign-in spending, especially in an inflationary economic environment. An extension beyond the 2024 election is likely.
With respect to spending caps, the opening Republican position is to limit discretionary spending to one percent growth each year for the next 10 years. This will be too long and too aggressive for Democrats. Do negotiators land at a budget cap window that is tied to the length of the debt limit increase? Possibly. But we believe it is more likely that the debt limit increase will be closer to two years of head room and the budget caps will be closer to four years, though the rate of growth may be higher than one percent (perhaps two percent).
COVID Relief Funds
The President has already shown a willingness to claw back some unspent COVID relief funds. Negotiators must first agree upon what funds are unobligated and unlikely to be spent. That process has already begun. Speaker McCarthy has suggested that the amount of funds available to claw back is as high as $50 billion. This remains to be seen. And to be sure, Democrats may be more protective of the funds the deeper the FY24 topline cut becomes and the longer the budget caps are imposed. In other words, this negotiating item is tied to the outcome of the first two items.
The two main policy provisions in play are expanded work requirements for Federal welfare programs and energy permitting reform. On the former, the President initially took increased requirements for Medicaid off the table but left open the door for addressing food stamp (SNAP) recipients. That was quickly rescinded on Monday in the face of congressional Democratic opposition. Yesterday, the Speaker stated publicly that expanded work requirements are one of his red lines. This will be one of the most difficult aspects of the negotiations. We expect the Speaker’s team—Graves, Leganski, Specht, and Yaworske—to push House Republicans’ position forcefully as they view the labor gap as directly tied to inflation and a potential recession.
On permitting reform, the House Republican opening position is H.R. 1, their fulsome domestic energy bill. This is a non-starter for Democrats. Instead, negotiators are likely to zero-in on energy permitting reform as the lowest common denominator. But here, too, the issue is complicated. First, the Democrats view reform as revolving around transmission projects for renewable energy sources. Republicans, meanwhile, focus on oil and gas projects as well as the pipelines that deliver those energy sources. Judicial reform is one area that could alleviate delays for both sides’ preferred projects.
Finally, rescinding Inflation Reduction Act (IRA) provisions like green energy tax credits and IRS funding that were included in the House Republican debt limit proposal will quickly be taken off the table by Ricchetti and Young.
OUTLOOK/ANALYSIS. Yesterday’s development was the natural progression of talks moving to a more serious and earnest stage. This is good news for a deal, but nothing has yet been agreed to. Assuming the x date remains as soon as June 1, we expect the House to stay in session until a deal is reached and can be written and brought to the floor. The Senate will likely take their scheduled recess next week as they wait for a deal to materialize. They are currently scheduled to return to session on May 30, though that could move up as circumstances dictate. Despite the shortened clock, we remain bullish on this team of negotiators reaching a deal by next week and Congress passing a bipartisan bill for the President’s signature before the June 1 deadline.