Macro update (debt limit)

Recent/upcoming developments… President Trump and conservatives have expressed a preference for addressing the debt limit on a partisan basis, so as not to give Democrats the ability to leverage it for achieving other policy concessions.  Reflecting this sentiment, the House-passed budget resolution includes a $4t debt limit increase.  The Senate-passed budget resolution does not include a debt limit increase.  Senate Republican leaders are reportedly still discussing trying to address the debt limit via negotiations with Democrats over FY25 government funding/appropriations, which needs to be resolved by 3/14, the date at which the current extension of FY25 funding/appropriations expires.  The next two weeks are thus an important window for determining how the debt limit will be resolved this year.

Our outlook… House passage of its budget resolution provides momentum to their approach for addressing the debt limit (i.e., on a partisan basis via reconciliation), which we now view as having a 65% probability (vs. 35% for addressing it via bipartisan negotiations with Democrats).  The challenge in addressing the debt limit via reconciliation will be that that reconciliation legislation is unlikely to be adopted until after the so-called “X date” (date by which the government runs out of cash) is reached in ~June/July.  Assuming Republicans decide to address the debt limit via reconciliation, and as they approach the X date, they recognize they won’t be able to enact reconciliation in time, they’ll have to split the debt limit out of the broader tax/spending provisions and pass it on a “clean” (no other provisions attached) basis.  While this is procedurally permissible, it will be a politically difficult vote, and thus likely mean its resolution will run right up to the X date deadline and require heavy lobbying from President Trump to get fiscal hawks on board.

Watch for these developments… We are watching for whether Senate Republicans visibly propose addressing the debt limit as part of a bipartisan deal on FY25 government funding/appropriations.  We are also looking for indications of how receptive Democrats (e.g., Senate Minority Leader Schumer (D-NY), House Minority Leader Jeffries (D-NY)) are to that approach.  Assuming they are not, then Republicans are likely to proceed with the House approach for addressing the debt limit on a partisan basis via reconciliation.  If we see Democratic receptivity to addressing the debt limit on a bipartisan basis, the probability of that scenario occurring will rise above the current 35%.