The Hunt for Debt October: Debt & Budget Battles

The TD Cowen Insight

Two large fiscal events will dominate Capitol Hill this year, the debt ceiling and the FY24 budget. TD Cowen Washington Research Group analysts discuss the implication for U.S. policy.

• June 5 is the X-Date, and October 1 is the start of a potential government shutdown
• Biden’s FY24 Budget is expected on March 9th & the House GOP budget is expected around April 15th
• Base case = Build more land as debt issue gets kicked to committee
• Social Security, Medicare & Defense appear safe, though discretionary spending caps are in play

Macro Policy

Few policy matters in Washington have such destructive economic capability — the fight in 2011 triggered the first credit downgrade. Our base case is that Washington will follow the old axiom: when at the edge of a cliff, build more land. In this case, it likely means a version of Senator Romney’s TRUST Act that would kick the debt/deficit to the Rescue Committee later in 2023.

We believe DC will continue to kick the can until the can kicks back. Though we would note the proverbial can is getting very heavy (debt-GDP %, rising interest expenses, and demographics of entitlement programs).

House GOP demands gelling around COVID-19 spending recissions (~$175B in unused pandemic funds) and work requirements (SNAP, TANF, and Medicaid); discretionary spending caps are in play. There also remains potential for a short-term debt hike to align the debt ceiling fight with a September 30 government shutdown fight over the budget.

Defense Policy

The outlook for defense spending (FY24 and later) is the main hostage in the debt ceiling debate (other than default). We remain optimistic about a positive outcome, although we admit it could be next year until a deal is reached and certainty is assured.

ESG & Sustainability Policy

We do not anticipate wholesale revisions to key BIL spending or IRA tax policy resulting from debt ceiling and FY24 budget negotiations. Setting aside the significant and obvious negative economic impacts associated with failure to maintain the full faith and credit of the US government, impacts to specific climate and energy policies are narrow and second order.

Financials Policy

Our view is that the globally systemically important banks will have the most immediate exposure to default. Yet the ramifications are likely to spread quickly to regional banks, credit card issuers, mortgage originators, and then to community banks and fintechs.

Health Care Policy

Updated CBO projections indicate that entitlement spending is expected to more than double by 2033, with Medicare reaching $1.6T (>4% of GDP). In our view, Congress is likely to punt the political football of entitlement reform to a committee or group to study the issue.