House GOP's budget 'poison pills' could force spending cuts, rattle economy

House Republican hardliners’ efforts to stonewall a budget deal ahead of a looming government shutdown could risk triggering automatic spending cuts later this spring that may put pressure on the U.S. economy’s already fraught recovery.

The first funding deadline is Friday at midnight when several government agencies including agriculture, veterans affairs and transportation, are due to run out of money. The second is next Friday, March 8, after which a full government shutdown would take effect if there is no funding resolution.

President Joe Biden has a meeting Tuesday morning about the budget impasse with House Speaker Mike Johnson, R-La., Senate Majority Leader Chuck Schumer, D-N.Y., Senate Minority Leader Mitch McConnell and House Minority Leader Hakeem Jeffries, D-N.Y.

The Fiscal Responsibility Act, enacted in June of last year, mandated that if a permanent government budget was not in place by Jan. 1 of this year, then spending would automatically be cut by $4 billion on April 30, according to a Congressional Research Service analysis.

In addition to the topline number, there would a mandatory shift in the share of funding allocated to defense and non-defense purposes. This would have the effect of automatically adding $33 billion to the non-defense spending column, and slicing $37 billion from the defense budget.

The government has been running solely on temporary spending bills since its fiscal year began in October, putting the FRA’s spending cut mandate in play.

The looming FRA cuts raise the stakes for the coming round of funding expiration dates.

Capitol Hill is facing yet another week of government shutdown déjà vu. A full-year budget deal to avert the FRA cuts appears increasingly unlikely, amid staunch opposition from the House’s ultraconservative wing.

Freedom Caucus derailment

Members of the House Freedom Caucus, a coalition of hardline conservatives, have been working to derail a permanent budget. Instead, they want to extend the current temporary spending resolution through the rest of the fiscal year, ensuring the FRA’s spending cuts are triggered on April 30.

Last Wednesday, the caucus sent a letter to Johnson, demanding he attach several hardline conservative policy provisions to any budget negotiations going forward.

The proposals, which include defunding Planned Parenthood, Biden’s “Green New Deal” and banning funding for DEI programs, would be dead on arrival in the Democrat-majority Senate, making them effectively “poison pills” that would tank any budget deal in which they were included.

Johnson has previously rebuked continuing to fund the government with short-term bills.

But he may ultimately cede to the Freedom Caucus to keep his job and avoid the ill fate of his predecessor, former House Speaker Kevin McCarthy. McCarthy was the first speaker to be ousted from his post, an effort led by the Freedom Caucus after a dramatic episode also involving a near-miss government shutdown.

Senate leaders have warned the House to quit the political games and strike a deal on a full-year budget.

“As always, the task at hand will require that everyone rows in the same direction toward clean appropriations and away from poison pills,” McConnell said Monday on the Senate floor.

Economic fallout

Government shutdowns tend to leave markets relatively unscathed. But if the FRA’s automatic spending cuts take effect, they could rattle the broader economy’s teetering recovery.

“In order to have a soft landing in 2024, additional fiscal stimulus would be needed (such stimulus definitely kept the economy stronger, longer in 2023),” Piper Sandler Chief Global Economist Nancy Lazar wrote in a Monday note.

Lazar added that government spending programs under President Joe Biden like student loan forgiveness, tax cuts and the CHIPS Act have been crucial to buoying the economy through its post-pandemic recovery. These policies, according to Lazar, are fiscal tailwinds that have the potential to boost business confidence.

“There could easily be an additional 1.5ppt boost to GDP from fiscal stimulus this year,” Lazar wrote.

But the House GOP’s desire to tank a full-year budget could squeeze that stimulus.

The Congressional Budget Office estimated in January that extending the spending terms of the current short-term resolutions could “result in across-the-board reductions ranging from 5 percent to 9 percent for nondefense funding and from zero to 1 percent for defense funding.”

Failing to enact a full-year budget would also leave the public with lingering questions about the government’s priorities, which are often reflected in a long-term spending plan.

“It’s one thing to have short-term CRs so we have additional time to negotiate on a good faith basis…but it is another thing entirely to do a year-long, CR because we have no intention of doing our job,” Sen. Patty Murray, D-Wa., said in December.

“When we put our government on autopilot, we are telling the world Congress is asleep at the wheel.”