After weeks of negotiations between House Speaker Nancy Pelosi (D-CA) and Treasury Secretary Steven Mnuchin, President Trump and congressional leaders signed off on Monday on a two-year budget deal. 

The deal raises the budget caps on defense and non-defense spending in FY20 and FY21 by a total of $321B. Only $77.4B would be offset with increased fees and an extension of cuts to Medicare and other programs that were set to expire in 2027. The deal provides $738B in FY20 and $740.5B in FY21 for defense spending and $632B in FY20 and $634.5B in FY21 for non-defense spending. The deal also suspends the debt ceiling for two years through July 31, 2021. At that point the debt ceiling would be reinstated and the Treasury Department would begin to use extraordinary measures to avoid defaulting on their obligations if Congress didn’t raise the debt ceiling. The extraordinary measures would potentially buy enough time until early 2022 before Congress would have to act again on the debt ceiling.

The House passed the two-year budget deal yesterday by a vote of 284 to 194. Sixteen Democrats voted against the measure: Blumenauer-OR, Brindisi-NY, Cooper- TN,Cunningham-SC, Harder-CA, Kind-WI, Lipinski-IL, McAdams-UT, Murphy-FL, Omar-MN, Peters-CA, Peterson-MN,Pressley-MA,Rice-NY, Schrader-OR, andSpanberger-VA.Republicans were divided on the measure, with 132 voting against it and 65 supporting it. The Senate will consider the measure early next week where it is expected to pass. And the President is expected to sign it given the support for the deal that he tweeted this week.

• Includes $103.812B in emergency supplemental disaster relief funding (P.L. 115-72) to respond to Hurricanes Harvey, Irma and Maria.

Congress can now turn its attention to completing action on its FY20 appropriations bills. The House has passed 10 of its 12 annual spending bills. They will have to rework some of those spending bills to reduce nondefense spending by $15B and increase defense spending by $5B to reflect the new budget deal. They will also have to strike some of the policy riders in their bills given the agreement in the budget deal prohibiting their inclusion.

The Senate will work in September on passing its FY20 spending bills. The subcommittee chairs and ranking members will get their subcommittee allocations in the next couple of weeks so that they can write their bills during the August recess. They will begin with the Defense and Labor HHS Education bills when they return the week of September 9. One more bill may be added to that first minibus package – Sen. Lamar Alexander (R-TN) would like it to be the Energy and Water bill. The committee may not mark up all 12 bills in committee given the time limitations. They may opt to send the bills directly to the Senate floor or begin conference negotiations. 

The House is scheduled to be in session 12 days in September and the Senate is scheduled for 15 days. Given the tight timeframe before the end of the fiscal year on September 30, a continuing resolution (CR) will likely be needed to avoid a government shutdown. 

FY2020 Appropriations Bills Status

Treasury Secretary Steven Mnuchin said Thursday morning that an agreement was reached between the administration and House Speaker Nancy Pelosi (D-CA) on spending levels for FY20 and FY21 as well as a two-year extension of the debt ceiling. Rep. Tom Cole (R-OK) said that the FY20 cap for defense spending would be somewhere between $733B and $750B. 

While both sides agree that there should be offsets for the spending cap increases, they are still discussing the specifics of those offsets. The last bipartisan budget deal included $38B in offsets for $296B in budget cap increases. Last night the Treasury Department sent a “menu” of $574B in spending cuts as well as $516B in savings that can be achieved by freezing spending levels in FY21-FY23. Democrats responded that the $1.1T offered by the White House are nonstarters. The administration wants at least $150B in offsets. This is the most significant final hurdle they need to clear before reaching a deal.

Secretary Mnuchin followed up stating that if they don’t get an agreement done in time, he is advocating for a separate debt ceiling increase. Speaker Pelosi didn’t comment on the Secretary’s statement that an agreement had been reached. The Speaker does want to pass an agreement on the House floor by next Thursday. House Minority Leader Kevin McCarthy (R-CA) said a final agreement wasn’t locked down yet, but that there was broad agreement on the debt ceiling timeframe. 

What’s also at play is other potential legislative riders that would be attached to the must-pass agreement such as expired tax provisions, whether the $22B needed for the Veterans Choice Program should count against the cap on nondefense spending, a retirement savings bill (H.R. 1994), and a tax technical corrections bill.Speaker Pelosi had said that she would need a deal by the end of this week in order to put it on the House floor next week. The House is scheduled to adjourn for the August recess next Friday. Both sides are continuing negotiations this weekend, but an additional week of work for the House is looking more likely.

Earlier this week the Bipartisan Policy Center (BPC) released a new forecast for when the Treasury Department will run out of extraordinary measures and can no longer pay its bills in full and on time without Congress raising the debt ceiling. BPC now forecasts the date as potentially early September, but the more likely outcome is early October. BPC’s original forecast in May was for debt default by October or early November. A decline in corporate tax revenue has pushed up these projected dates. Corporate revenue is running about 9% below the previous fiscal year. While BPC’s forecast carries uncertainty, BPC’s message to Congress is that it can’t ignore the forecast and needs to deal with the debt limit before they adjourn for the August recess. Congress is scheduled to return from the August recess on September 9.

Treasury Secretary Steven Mnuchin today sent a letter to House Speaker Nancy Pelosi (D-CA) in which he wrote that while “it is impossible to identify precisely how long extraordinary measures will last…” he requests “that Congress increase the debt ceiling before Congress leaves for summer recess.” House Speaker Nancy Pelosi (D-CA) has previously said she would not agree to raise the debt limit before an agreement on spending caps is reached. Progressives in her party are pushing her to use these negotiations to increase non-defense spending and demand action on some House-passed Democratic policies. Without a budget caps deal, an automatic $126B in sequestration cuts would kick in at the end of the year. The Administration would prefer to untangle the debt ceiling issue from the budget caps negotiations. This updated timeline could make linking the two issues more difficult.

On the Senate side, Senate Appropriations Committee Chairman Richard Shelby (R-AL) responded to the new BPC forecast saying that this would accelerate the need for serious negotiations. Senate Majority Leader Mitch McConnell (R-KY) said that he would push to get a bipartisan agreement on raising the debt limit and setting the spending limits for FY20 before the August recess. With respect to the FY20 appropriations bills, Shelby said that his committee won’t markup their FY20 spending bills until there is a budget caps deal. 

The House is scheduled to adjourn on July 26, not leaving much more time for concluding negotiations and passing whatever deal is eventually reached. The Senate is scheduled to be in session through August 2. The House will likely have to add another week of session to get this done before they leave for the August recess.