In this commentary, we offer details of the recent Murray-Ryan budget deal and how it may or may not affect another potential government shutdown, the debt limit, and emergency unemployment insurance, among other factors.
- Last week Senator Patty Murray and Congressman Paul Ryan announced a small budget deal. The deal includes adjustments to the budget caps for fiscal year 2014 (FY14) and FY15, allowing for a small increase in discretionary spending in both years (+$45 billion and +$20 billion in FY14 and FY15, respectively). The increased spending is offset by some new fees—e.g., fees paid by passengers to fund TSA—and some changes to pension plans for federal workers. The deal does not make any changes to the tax code or to entitlement programs. As of December 18 the deal has passed both houses of Congress, and is headed to President Barack Obama’s desk, where he will quickly sign it into law.
- The Murray-Ryan deal almost certainly takes the possibility of another government shutdown off the table for the next year, and perhaps for the next two years. Congress still needs to pass appropriations bills by January 15, 2014 in order to avoid another government shutdown, but the hardest part of the appropriations process is always agreeing to the top-line number. Now that the top-line number has been agreed upon, the rest of the appropriations will likely happen without incident in January.
- The Murray-Ryan deal does not address the debt limit, which means that Congress is not completely done with fiscal negotiations for 2014. The agreement that ended the shutdown in October extended the debt limit to February 7, 2014. After February 7, the Treasury Department will use its “extraordinary measures” to continue borrowing for a few additional weeks, perhaps until late March or early April, at which point Congress will once again have to find a way to increase the debt limit. While there is, as always, a possibility that the debt limit negotiations are contentious, our current expectation is that there will not be a repeat of the October brinksmanship. First, the October negotiations were unpleasant for both sides, and we can’t imagine either side looking to repeat that experience. Second, the leadership on both sides has been very clear that it does not want to cause a default on US debt, and while the rank-and-file were able to maneuver the leadership into a negotiation over the debt limit last October, the leadership is unlikely to be out-maneuvered again. Finally, the Murray-Ryan deal may signal some degree of détente between the two parties on fiscal issues, which could carry over to the debt limit debate.
- In addition to the debt limit, the Murray-Ryan deal leaves a number of other items unaddressed. First, Congress has not extended emergency unemployment insurance (UI), which means that as many as one million uninsured workers will have their UI benefits expire in 2014. The affected workers have all been out of work for more than a year, and many may simply stop looking for work after their benefits expire (actively looking for work is a requirement to receive UI benefits, so without that incentive these workers may choose to stop looking). This could in turn lead to further declines in the unemployment rate, perhaps on the order of 0.25%. Second, Congress still needs to adjust payment rates to Medicare providers, which are currently scheduled to drop by more than 20% at the end of this year. Finally, there are a number of tax cuts that are set to expire, including the popular research and development tax credit. Congress usually finds a way to extend this tax credit toward the end of the year.
- Conclusion: The main accomplishment of the Murray-Ryan deal is that it will likely prevent a government shutdown for the next two years. However, the deal leaves a number of things unaddressed, most notably the debt limit, and does not do anything to address deficits, taxes or entitlements.
Over the next several weeks, we will continue to offer our thoughts on the federal budget, its evolution, and its implications for fixed-income markets. Please continue to visit www.westernasset.com in order to access this commentary.