Happy Monday! The final days of the 117th Congress are drawing near, but lawmakers still have plenty to do before the end of the year. Current government funding expires in 11 days, and the annual defense authorization, which has passed for 60 years straight, is not done yet. Tuesday will bring the culmination — we hope! — of the Georgia Senate runoff between Democratic Sen. Raphael Warnock and Republican challenger Herschel Walker. Until those votes are tallied, here’s what we’re watching.
Lame-Duck Spending Fight Drags On
Congress has yet to make major progress on one of its most basic responsibilities for the year: funding the government.
Fiscal year 2023 started back in October but lawmakers have yet to agree to topline spending levels for the year. House and Senate negotiators reportedly neared a deal last week that would set defense spending at $847 billion, or some $45 billion above the level sought by President Joe Biden. Overall national security spending could run as high as $858 billion, Politico reported.
With defense spending set for a huge boost, Democrats are pressing for a comparable increase in non-defense funding. Republicans are pushing back, arguing that domestic spending should be cut because Democrats already pushed through two big partisan bills in last year’s $1.9 trillion Covid rescue plan and this year’s Inflation Reduction Act. That bill included climate, health care and tax provisions along with more than $200 billion in deficit reduction over 10 years.
“The reconciliation bills spent a ton on domestic,” Sen. Lindsey Graham (D-SC), a member of the appropriations committee, told The Hill. “So, that has to be factored in and in terms of more domestic spending.”
Graham added that the defense spending needs are real and it will be difficult to match those levels on the non-defense side. “There won’t be an omnibus unless you have a generous defense number,” he said, “and, given the multiple trillions of dollars that were spent and reconciliation bills on domestic programs far beyond just COVID, it will be difficult to get a one for one.”
House Speaker Nancy Pelosi (D-CA) and other top Democrats last week raised the prospect of a full-year continuing resolution, which would keep federal funding at 2022 levels. “If Republicans won’t come to the table and negotiate, we could go to a one-year CR if that’s what they want to do,” Rep. Rosa DeLauro, chair of the House Appropriations Committee, told The Hill last week.
Pentagon leaders have warned against such an outcome, and lawmakers in both parties are extremely wary of freezing defense spending at 2022 levels, fearing that it would risk national security. Republicans would prefer a short-term stopgap funding measure that would allow the new GOP-controlled House in the 118th Congress to have more leverage in spending talks.
What’s next: The National Defense Authorization Act appears to be on track, with a floor vote in the House scheduled for later this week. One potential hiccup: The White House is opposing using the bill to repeal a vaccine mandate for military servicemembers and Republicans have threatened to delay the bill if the mandate isn’t repealed. And another: Democrats trying to salvage Sen. Joe Manchin’s energy permitting reform bill may try to attach it to the NDAA.
The outlook for annual spending bills is far less certain. With current government funding set to expire on December 16 — and neither side interested in a year-end shutdown —another stopgap spending bill, likely until December 23, is expected to be necessary as the two sides try to work out a broader deal. Punchbowl News notes that Senate Minority Leader Mitch McConnell (R-KY), who has supported the idea of a full year omnibus spending deal, will be key: “McConnell and other senior Senate Republicans are taking a tough line, despite a high-level meeting in the White House last week where everyone promised to get along.”
Number of the Day: 7%
Rising interest rates are showing up at the IRS, too. Starting in January, those who underpay their taxes will have to pay a higher interest rate on what they owe. “For individuals, the rate for overpayments and underpayments will be 7% per year, compounded daily, up from 6% for the quarter that began on October 1,” the tax agency said in a recent announcement. Large corporations will pay even more, thanks to a new 9% levy on underpayments. (h/t Renu Zaretsky at the Tax Policy Center)
Quote of the Day: Targeting the IRS
“It’s just general consensus that people don’t like us. Just suggesting that the IRS employees are a threat and dangerous doesn’t make our job any easier. We’re an easy target to pick on.”
— Tax revenue officer Tim Ronholm, president of a Minnesota chapter of the National Treasury Employees Union, talking to Politico Weekly Tax about threats to the IRS and its employees in the wake of Republican attacks on the tax agency this year.
While Politico’s Benjamin Guggenheim says it’s not clear if the GOP’s fearmongering over the $80 billion the IRS will receive over the next 10 years thanks to the Inflation Reduction Act has translated directly into an increase in actual physical attacks, it seems likely that false claims about an “army of 87,000 IRS agents” coming after middle-class families and small businesses hasn’t undermined morale at the IRS, while raising the risk of assaults. “The rhetoric which puts employees potentially in danger is so disheartening,” Lorie McCann, the president of a Chicago chapter of the NTEU, told Politico.
Chart of the Day: Has Inflation Already Peaked?
Strong economic data is raising the odds that the Federal Reserve will raise interest rates higher than previously expected and keep rates high for longer. “Stronger demand for labor, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation suggest a modestly higher path for policy relative to September,” New York Fed President John Williams said last week. “Not a massive change, but somewhat higher.”
At the same time, plenty of economists are concerned that the Fed may go too far in its battle against inflation, since it takes time for monetary tightening to work its way through the economy and show up in the statistics. By the time the official inflation rate drops, it may be too late to stop the economy from falling into a recession.
In an attempt to get ahead of the game, Fed economists look at a range of measures that can provide an early signal of what will happen with overall inflation in the coming weeks and months. As we told you last week, one key measure the Fed tracks, the Personal Consumption Expenditures price index, showed signs of easing last week. Bloomberg’s John Authers on Monday looked at a variation of that measure, the “trimmed mean” version, and found that it suggests that inflation is already slowing.
“The latest hard data on inflation, the Personal Consumption Expenditure deflator for October, did confirm the message that inflation does look as though it may well have peaked,” Authers says. “Using the Fed’s favored measure of the ‘trimmed mean,’ which excludes the greatest outliers and takes the average of the rest, inflation did indeed tick down slightly last month, on both a year-on-year and month-on-month basis. There’s still a long way to go, but it’s important that this stripped-down measure of inflation beloved by purists is no longer accelerating.”
“I don’t think any of this proves that inflation will come down swiftly and allow the Fed to start easing in short order,” Authers adds, “but it does suggest that the economy is slowly turning in the direction that anti-inflationistas want.”
News
- Inside the Fight for an End-of-Year Deal on the Child Tax Credit – Vox
- Social Security Offices Critical to Disability Benefits Hit Breaking Point – Washington Post
- GOP Says Inflation Reduction Act Should Be Factored Into Spending Fight – The Hill
- GOP Seeks to Play Hardball on Annual Defense Bill – The Hill
- White House Opposes Repealing Military Vaccine Mandate Through NDAA – The Hill
- Ukraine Aid and Stealth Bombers: Pentagon Lays Out Consequences if Congress Can’t Pass a Budget Deal – Politico
- ‘We Haven’t Got This Figured Out Just Yet’: Pentagon, Industry Struggle to Arm Ukraine – Politico
- Armed Services Chair Rips Calls for Stepped Up Oversight of Ukraine Aid – Politico
- Pentagon Chief Warns of Pivotal Point: ‘We’re Aligning Our Budget as Never Before to the China Challenge’ – Associated Press
- US Could See a Fight Over Debt Ceiling That Rocks Markets, Goldman Sachs Warns – CNN
- Fed to Weigh Higher Interest Rates Next Year While Slowing Rises This Month – Wall Street Journal
- Senators Pitch Deal to Protect ‘Dreamers,’ Boost Border Security – Roll Call
- The Making of the U.S. Military's New Stealth Bomber – Time
- Hackers Linked to Chinese Government Stole Millions in COVID Benefits, Secret Service Says – NBC News
Views and Analysis
- Everything Democrats Could Do if Warnock Wins – Ross Barkan, New York Times
- ‘Soft Landing’ Is a Terrible Name for What’s Coming – Heather Long, Washington Post
- Strengthen the Child Tax Credit Before Expanding It – Ramesh Ponnuru, Bloomberg
- Does the Child Tax Credit Reduce Child Poverty or Discourage Work? – Elaine Maag, Tax Policy Center
- Jay Powell’s Dream of the 90s Is Dead – Nicole Goodkind, CNN
- In the Senate, 51 Votes Is a World Apart From 50 – Jonathan Bernstein, Bloomberg
- Who Benefits From a Lame Duck Extension of Child Credits and the TCJA's Business Tax Breaks? – Howard Gleckman, Tax Policy Center
- Biden, Macron and the End of the Reagan-Thatcher Era – E.J. Dionne Jr., Washington Post
- Finally, a Bipartisan Deal to Help the ‘Dreamers’ Is Within Reach – Greg Sargent, Washington Post
- Hey, Congress: No Last-Minute Shopping at Taxpayer Expense – EJ Antoni, Heritage Foundation
- Congress Needs to Address the ‘Soft Racism’ in Its Annual Spending Process – David A. Weaver, The Hill