Republican Debt Ceiling Proposal Would Cut Means-Tested Programs, Student Loan Forgiveness

Republicans in the House of Representatives managed to pass a bill to increase the U.S. government’s debt ceiling on Wednesday by a vote of 217 to 215. The bill has essentially no chance of passing in its current form, which will do nothing to reassure investors watching the negotiations closely.

The bill is called the Limit, Save, Grow Act of 2023, and it aims to reduce federal spending. It would authorize the Department of the Treasury to issue $1.5 trillion in new debt or issue debt until March 31, 2024, whichever comes first. The bill would repeal some subsidies provided to incentivize the development of renewable energy and electric vehicles and would require the administration of President Joe Biden to lease more federal lands for gas, oil and mineral extraction. It would also implement new work requirements for means-tested programs such as food stamps, TANF and Medicaid.

In a section of the bill called “Prohibit Unfair Student Loan Giveaways,” the bill would nullify the student loan forgiveness program in its entirety, including the provision that limits debt repayments to 5% of a debtor’s income, and would prevent the Department of Education from promulgating a similar rule in the future. The legality of this program is currently being considered by the Supreme Court.

Lastly, the bill would bring discretionary spending for 2024 down to 2022 levels and cap discretionary spending increases at 1% through 2033.

According to Max Richtman of the National Committee to Preserve Social Security and Medicare, this would reduce funding for most federal agencies by 23%, which would include the administrative budget for Social Security. The bill would reduce Social Security’s ability to provide customer service and cover its administration but would not reduce Social Security payouts. The 23% cut should not be confused with the 23% cut in benefits that the Social Security trustees anticipate being necessary starting in 2033.

While the word “veto” is technically absent from the White House’s statement on the proposal from last week, the bill is unlikely to pass the Democrat-controlled Senate and all but certain to be vetoed by Biden. The White House statement characterized the proposal as “extreme” and said it would be devastating for families, scientific and medical research, and education, among other spending priorities for the administration.

Though the House version won’t survive in its current form, it can be understood as the Republican’s starting position in upcoming negotiations as well as signaling their priorities in those negotiations.

Northern Trust’s monthly asset allocation update noted that the debt ceiling negotiations will reduce investor sentiment and could increase the costs of debt. Anticipating debt ceiling difficulties, J.P. Morgan recommended back in January, that investors should diversify away from the US market, saying “diversification is the best defense” in the event of a “disorderly debt ceiling episode.”