On September 30, 2021, Congress averted a potential federal government shutdown by passing a last-minute bill to fund government operations through December 3, 2021. Two weeks later, another measure raised the debt ceiling by just enough to sustain federal borrowing until about the same date. Although these bills provided temporary relief, they did not resolve the fundamental issues, and Congress will have to act again by December 3rd.
Spending vs. Borrowing
The budget and the debt ceiling are often considered together by Congress, but they are separate fiscal issues. The budget authorizes future spending, while the debt ceiling is a statutory limit on federal borrowing necessary to fund already authorized spending. Thus, increasing the debt ceiling does not increase government spending. But it does allow borrowing to meet increased spending authorized by Congress.
The underlying fact in this relationship between the budget and the debt ceiling is that the U.S. government runs on a deficit and has done so every year since 2002.1 The U.S. Treasury funds the deficit by borrowing through securities such as Treasury notes, bills, and bonds. When the debt ceiling is reached, the Treasury can no longer issue securities that would put the government above the limit.
Twelve Appropriations Bills
The federal fiscal year begins on October 1, and 12 appropriations bills for various government sectors should be passed by that date to fund activities ranging from defense and national park operations to food safety and salaries for federal employees.2 These appropriations for discretionary spending account for about one-third of federal spending, with the other two-thirds, including Social Security and Medicare, prescribed by law.
Though it would be better for federal agencies to know their operating budgets at the beginning of the fiscal year, the deadline to pass all 12 bills has not been met since fiscal year 1997.3
In order to buy time for further budget negotiations, Congress typically passes a continuing resolution, which extends federal spending to a specific date based on a fixed formula. The September 30th resolution extended spending to December 3 at fiscal year 2021 levels. Adding to the stakes of this year’s budget negotiations, spending caps on discretionary spending that were enacted in 2011 expired on September 30, 2021, so fiscal year 2022 budget levels may become the baseline for future spending.4
Raising the Ceiling
A debt limit was first established in 1917 to facilitate government borrowing during World War I. Since then, the limit has been raised or suspended almost 100 times, often with little or no conflict. However, in recent years, it has become more contentious. In 2011, negotiations came so close to the edge that Standard & Poor’s downgraded the U.S. government credit rating.
A two-year suspension expired on August 1 of this year. At that time, the federal debt was about $28.4 trillion, with large recent increases due to the $3 trillion pandemic stimulus passed with bipartisan support in 2020, as well as the 2021 American Rescue Plan and continuing effects of the Tax Cuts and Jobs Act of 2017.5 The Treasury funded operations after August 1 by employing certain “extraordinary measures” to maintain cash flow. Treasury Secretary Janet Yellen projected that these measures would be exhausted by October 18.
The bill signed on October 14 increased the debt ceiling by $480 billion, the amount the Treasury estimated would be necessary to pay government obligations through December 3, again using extraordinary measures. Unlike the budget extension, which is a hard deadline, the debt ceiling date is an estimate, and the Treasury may have a little breathing room.
If the budget appropriations bills — or another continuing resolution — are not passed by December 3, the government will be forced to shut down unfunded operations, with the exception of some essential services. This occurred in fiscal years 2013, 2018, and 2019, with shutdowns lasting 16 days, 3 days, and 35 days, respectively. A Senate report estimated that the three shutdowns cost taxpayers almost $4 billion and nearly 57,000 years of lost production time.6
Although the consequences of a government shutdown would be serious, the economy has bounced back from previous shutdowns. By contrast, a U.S. government default would be unprecedented and could result in unpaid bills, higher interest rates, and a loss of faith in U.S. Treasury securities that would reverberate throughout the global economy. The Federal Reserve has a contingency plan that might mitigate the effects of a short-term default, but Fed Chair Jerome Powell has emphasized that the Fed could not “shield the financial markets, and the economy, and the American people from the consequences of default.”
Given the stakes, it is unlikely that Congress will allow the government to default, but the road to raising the debt ceiling is unclear. The temporary measure was passed through a bipartisan agreement to suspend the Senate filibuster rule, which effectively requires 60 votes to move most legislation forward. However, this was a one-time exception and may not be available again. Another possibility may be to attach a provision to the education, healthcare, and climate package slated to move through a complex budget reconciliation process that allows a bill to bypass the Senate filibuster. However, the reconciliation process is time-consuming, and it is not clear whether the debt ceiling would meet parliamentary requirements.
The budget and the debt ceiling are serious issues, but Congress has always found a way to resolve them in the past. It’s generally wise to maintain a long-term investment strategy based on your goals, time frame, and risk tolerance, rather than overreacting to political conflict and any resulting market volatility.
Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.
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Last week was a very intense week that left most people, regardless of political leanings, very anxious as ballot counting continued through the end of the week.
It appears that former Vice President Joe Biden will be the next President (legal challenges and recounts leave some uncertainty but are not likely to shift the overall outcome). His inauguration is January 20th, so let us look at what to expect with his presidency and how it could impact your portfolio:
1. COVID-19 Pandemic
With rising cases, it is expected that Biden will rely on the advice of health experts who may recommend a federal mandate for masks and social distancing. We expect an effort to increase testing and tracing until a vaccine becomes widely available (we got some good news today from Pfizer on their clinical trials). Assuming the FDA approves at least one vaccine by early January and mass immunization of the general population starts shortly thereafter, economic growth could pick up sharply in the 1st half of 2021.
2. More Fiscal Stimulus
Many expect a bi-partisan deal offering aid to those impacted by COVID. The timing and amount of stimulus are hard to predict, but a package could include expanded eligibility and extension of unemployment insurance, new funding for the Paycheck Protection Program (PPP), aid for state and local governments, and additional funding for COVID-19 public health efforts. Another round of payments to individuals is less clear.
3. Foreign Policy
President-elect Biden could partially reverse the course that President Trump was on by easing tariffs, updating trade agreements, and re-instating certain treaties. The effect of a Biden presidency on tensions between the U.S. and China remains unknown.
President-elect Biden made increasing taxes on corporations and wealthy Americans a centerpiece of his campaign. His ability to do this will be impacted by the outcome of a January double runoff in Georgia for Senate seats. If the Democrats win these Georgia Senate races, they will control the Presidency and the House, and the Senate would be split 50-50 with the deciding vote going to Vice President-elect Kamala Harris. If these two races are split, then the Republicans will enjoy a 51-49 majority in the Senate and the President’s ability to push through anything but modest tax reform will be compromised.
President-elect Biden may use executive orders to reverse some of Trump’s executive orders – especially with regards to certain immigration issues.
How does this impact the stock market?
We have seen equity markets respond positively since the election; however, we cannot forecast how long the honeymoon will last. We do believe that corporate earnings will improve significantly in 2021 and that is what is most important to investors. We are continuing to focus on long term investing using a disciplined approach.
How does this impact my finances?
Few policy experts believe President-elect Biden will address tax policy right out of the gate. Instead, he is expected to focus attention on seeking Congress’s support to enact his more immediate coronavirus relief package to help shore up the economy. We will continue to monitor how this may impact your finances.
Fiscal legislation stalled last week and with the current stimulus expiring President Trump this weekend signed new executive orders to provide temporary relief and hopefully help break the current gridlock in Washington. There are four key areas that we will take a closer look at:
1. Extend Unemployment Insurance – The $600 in additional weekly unemployment benefits under the CARES Act expired at the end of July. The executive order will provide $400 a week in extra benefits to anyone receiving at least $100/week in regular benefits with 75% being paid by federal funds and 25% being paid by the states. This order is designed to be a temporary stop-gap until more permanent solutions are passed. As a result, the extra $400 a week benefit may last another 4-6 weeks for individuals.
2. Deferral of Student Loans – Under the CARES Act no payments and no additional interest was set for all Education Department loans and this was set to expire September 30th. The new executive order will extend these benefits until the end of the year (December 31st).
3. Minimize Evictions and Foreclosures – The CARES Act provided protection for evictions and foreclosures but the dates they expired were different. The new executive order aims to provide more protection to prevent evictions and foreclosures due to COVID. The order should make funds available to aid renters and homeowners that cannot meet their obligations. The order also instructs the HUD and Treasury secretaries to make funds available to assist renters and homeowners unable to meet their obligations.
4. Payroll Tax Deferral – The executive order will stop automatic withholding of employee paid Social Security tax of 6.2% for employees who make less than $4,000 every two weeks (approximately $104,000 per year) until the end of the year (December 31st). This is the most complex and controversial part of the executive orders. The challenge is that technically only Congress can reduce or eliminate payroll taxes so for this to go into effect there must be a reasonable expectation for Congress to move forward with this. The payroll tax deferment is scheduled to take effect on September 1st.
The goal of these executive orders is akin to slapping tape on a leaky pipe. They will provide temporary relief but do not make the situation permanently better. If these policies are indeed implemented, this suggests that they might force Congress to act by the start of September to avoid further disruptions.