Budget Deal Paves Way for Additional Fiscal Stimulus

Economy

Budget Deal Paves Way for Additional Fiscal Stimulus

Washington Policy Analyst Ed Mills details the new budget agreement passed by Congress.

February 9, 2018

The budget deal passed early this morning is the latest fiscal stimulus passed by Congress, representing an additional $300 billion in federal government spending over the next two years as well as an additional $90 billion in disaster aid. The final details of the spending priorities will be worked out in the coming weeks, but this deal includes an $80 billion boost to defense spending caps for FY2018 and an additional $85 billion for FY2019. Domestic spending will see a boost of $63 billion in FY2018 and $68 billion in FY2019. As mentioned, these are new spending caps, and the next deadline for Congress is March 23, at which time Congress is expected to approve the final details of funding priorities through the end of the fiscal year (September 30). This bill follows the tax bill with adding fiscal stimulus to the economy. We believe this will lead to a debate on the market impact of these combined actions, as tax cuts are frequently tied to spending cuts – especially at the state level.

Increased Spending

The budget deal increases the federal government’s spending caps by almost $300 billion over the next two years, adding a fresh round of fiscal stimulus. The defense budget caps are increased by $80 billion and domestic spending by $63 billion over current levels for 2018, rising to $85 billion for defense and $68 billion for domestic spending in 2019.

Debt Limit

A critical part of the budget agreement is lifting the debt limit until March 2019, taking this debate off the table until after November’s midterm elections. Treasury Secretary Mnuchin had warned that the debt limit needs to be raised by early March to avoid a potential default.

Still Need Actual Spending Bill

While lifting the budget caps, this bill only funds the government through March 23. Over the next six weeks, Congressional leaders will negotiate the final details for the final FY2018 funding bill, which would fund the government through September 30. The lifting of the budget caps gives Congressional leaders considerable more flexibility when negotiating this deal and the threat of a subsequent government shutdown would be relatively low. This could also give one last opportunity for Congressional Democrats to balk should an immigration deal/DACA fix not advance in the coming month.

Budget Reform

In the longer term, the budget agreement will attempt to reform the Congressional budget process by setting up a Congressional committee responsible for creating a report on process improvements and potential cuts. Although any recommendations by the committee would have to be voted on and approved by Congress with Democratic support, the committee presents an opportunity for Congressional Republicans to set down a marker for future debates on spending cuts. The report is due by the end of the year, and will likely take cues from the midterm election results for future spending priorities.

Disaster Aid

The final agreement includes almost $90 billion dollars in disaster relief aid for states, communities, and businesses impacted by storms and natural disasters in 2017. $28 billion will flow to the Department of Housing and Urban Development’s (HUD) Community Development Fund targeted at rebuilding storm damaged homes, buildings, and infrastructure. $23.5 billion is provided for the Federal Emergency Management Agency (FEMA) disaster relief fund to support state, territory, possession, and local government recovery efforts from Hurricanes Harvey, Irma, and Maria. $17.39 billion is provided to the U.S. Army Corps of Engineers for infrastructure and modernization efforts aimed to reduce damages from future weather events. $5.9 billion is dedicated to providing an increase to Medicare caps for storm-hit Puerto Rico and the U.S. Virgin Islands.

Tax Extenders

A variety of tax extenders are included in the agreement dealing with personal, business, and energy tax provisions. Of note, biomass, geothermal, waste-to-energy, and certain hydroelectric project production tax credits are included retroactively to 2017, along with other retroactive tax credits for energy efficient investments and biofuel production. The agreement also eliminates a 2020 sunset date for a new nuclear power plant tax credit and expands tax credits for carbon capture and sequestration. A restored 9-cent-per-barrel tax on oil for oil spill cleanup efforts is included in the agreement.

Healthcare Provisions

A number of provisions affecting Medicare payments are part of the agreement. Medicare Part D prescription drug costs – 50% of which is paid by the manufacturer under the current system – would be raised to 70% cost to the manufacturing company in 2019 as a further federal cost offset. A repeal of the limits on Medicare payments for outpatient therapy is included, along with an extension of $5 billion in Medicare hospital payments. $400 million is provided to fund community health workers with $6 billion in funds for programs combatting opioid abuse and addiction. The previously passed six-year reauthorization of CHIP is extended to ten years. Obamacare’s Independent Payment Advisory Board is eliminated.

Offsets

A $2.5 billion offset for increased spending in the budget agreement is included via a new $7.5 billion cap on the Federal Reserve’s surplus, down from $10 billion. The agreement also authorizes $350 million worth of immediate Strategic Petroleum Reserve sales with an additional 100 million barrels worth authorized to be sold by 2027 (30 million between 2022-2025; 35 million in 2026; 35 million in 2027 fiscal years). Further offsets included in the package are customs user fees; aviation security service fees; extension of certain immigration fees; and reemployment services and eligibility assessments. Offsets are expected to total around $100 billion.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur.



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