On April 19, House Speaker Kevin McCarthy (R-CA) released the Limit, Save, Grow Act, the House GOP’s first offer to trade government-wide spending cuts to avert an economy-crashing national debt default. The plan, which could pass the House by this Wednesday but will certainly stall in the Senate, includes provisions to:

• Raise the debt ceiling by $1.5 trillion or until March 31, 2024, whichever comes first.
• Cut government-wide spending to FY 2022 levels, then limiting future spending increases to 1% per year. Republican leaders like Rep. Tom Cole (R-OK) told the press they plan to raise defense, homeland, and veterans spending which would require even deeper cuts to priorities like health, education, and transportation to meet this new spending limit.
• Repeal most clean energy tax credits created under last year’s Inflation Reduction Act (IRA) and repeal the IRA’s $80 billion enforcement spending increase to the Internal Revenue Service.
• Add new work requirements for recipients of social programs like Medicaid, the Supplemental Nutrition Assistance Program (SNAP), and Temporary Assistants for Needy Families (TANF).
• Rescind about $100 billion in unspent COVID aid intended for state and local governments under the 2021 American Rescue Plan Act.
• The text of the House-passed Lower Energy Costs Act (H.R. 1) energy permitting bill, plus the Regulations from the Executive in Needs of Scrutiny (REINS) Act to reduce the White House’s future regulatory power.
• Block the Biden Administration’s student loan forgiveness plan.

Democrats and the White House quickly rejected this plan. House Democrats and the Biden Administration have already outlined how deep spending cuts could hurt domestic environmental, education, and public health priorities. The White House on April 20 argued that repealing IRA tax credits would roll back economic progress in rural and Republican-held districts. House Republicans hope to pass this bill in their chamber around April 26th and pass pressure to develop a more bipartisan plan back to Democrats. However, the push could also test Speaker McCarthy’s leadership. Below, we look at the stakes of this fight and likely outcomes.

Last week, Goldman Sachs added new urgency to debt ceiling talks warning that the U.S. could breach the debt limit in the first half of June, aligning with the Department of Treasury’s predictions. This report jolted members of Congress who had relied on alternative reports from the U.S. Congressional Budget Office placing the deadline in late summer. (Treasury and CBO expect to publish updated predictions in coming weeks). Moody’s Analytics in March warned the Senate that even a brief federal debt-limit breach could cause a global financial crisis and recession mirroring the 2008 collapse. Despite the high stakes, Congress has been slow to act: Democrats insist on a “clean” debt ceiling increase without any other changes, while Republicans say they want concessions on spending and policy but only recently put a full plan to paper. The bipartisan Problem Solvers Caucus attempted to advance discussions with their own plan, but so far haven’t found traction with leaders in either party.

With a new bill in hand and no Democratic support, Speaker McCarthy and House Republican leaders now must secure at least 218 votes from within their own party to pass the bill in their chamber. If just five House Republicans withdraw support, the bill will fail. Conservatives within the party such as Rep. Matt Gaetz (R-FL), are pushing for even higher work requirements for recipients to access SNAP; while the energy and agricultural industries are set to oppose the bill’s repeals of IRA tax credits; and Republicans from swing districts fret about constituent blowback if they support a very conservative bill that will only stall in the Senate. While House Republican leaders insist the bill is not open for changes, the press reported that leadership may indeed amend the bill to get it across the finish line.

While House Republicans may achieve their short-term goal of passing this bill, the endgame is still unclear and weeks away. Because the U.S. Constitution says tax-focused bills must start in the House, the House bill’s repeal of key provisions in the IRA opens the door for the Democratic-controlled Senate to not only strip out that repeal but add their own tax measures: possibly to to restore the lapsed Child Tax Credit and a business-backed research and development credit, among other priorities. The Senate is also primed to replace the House’s H.R. 1 energy bill with a more bipartisan proposal, as two Senate committees are now drafting their own plans in late April and early May. Many bipartisan Senate funding leaders have already rejected House-favored deep spending cuts. Another path for negotiations may not go through the Senate at all, but rather in talks between the House and the White House. If these two entities can reach a bipartisan deal, then the Senate may simply sign off rather than risk economic catastrophe.

Ultimately, any future deal will need to pass the Republican-controlled House once again, creating a risk for Speaker McCarthy. Many parts of the House Republicans’ new bill are bedrock promises that McCarthy offered to the GOP’s conservative wing to secure his speakership. If McCarthy eventually endorses a compromise debt ceiling bill that displeases enough conservative House members, then he could soon face another bitter challenge for his job.

How will all this resolve? While no one knows for sure, we’re betting that the two parties will eventually compromise to trade a debt ceiling increase for relatively modest domestic spending cuts and an energy-focused permitting reform bill. As the 2024 presidential election approaches, neither party wants the blame for crashing the economy, and Democrats may be ultimately more willing to accept spending cuts now over more drastic and permanent proposals. Key parts of the business community may also pressure both parties to maintain the IRA’s incentives to transition to clean and alternative energy; similarly, both parties want a permitting reform bill to speed new infrastructure projects. In the meantime, Moody's warned Monday that U.S. and global businesses could grow nervous as the default date approaches in June. Both federal contractors and private businesses could brace for a stock market crash, recession, and uncertain federal payments by slashing expenses and payroll. These moves could speed an economic downturn even if Congress eventually enacts a fix.

The bipartisan Michael Best Strategies team is constantly tracking Congress’ budget and appropriations process. To learn more about this process and how it affects your business, contact the author or your Strategies servicing team.