Congressional leaders returned to work this week with a full plate of legislative leftovers – and with a Republican majority in the Senate reduced to 51-49 after Democrat Doug Jones was sworn in as the junior senator from Alabama. However, Republicans will need 60 votes in the Senate for everything on the agenda. That means bridging the divide between conservative Republicans and moderate Democrats. A lot of Republican infighting should be expected over the coming weeks.

The most important items on the agenda are:

Budget 2018

Funding for the federal government expires on 19 January, although it could be extended yet again. Federal spending is guided by the spending caps introduced in 2011 as part of the deal to lift the debt ceiling. Without legislation, the funding level set out in 2011 will kick in so that funding for defense is reduced from current levels by USD54 billion and non-defense by USD37 billion.

The President’s budget calls for deep cuts to non-defense spending in order to boost spending on the military, but this has already been ruled out by Republicans and Democrats alike. Democrats want “parity” so that non-defense domestic programs (overall) receive the same additional funding as defense. Republican leaders have suggested a smaller increase in non-defense spending, but would also like to remove the spending caps completely to allow for a permanent increase in defense spending. While conservatives were happy to support tax cuts without worrying about the deficit, the same does not apply to spending. Hence, Democrats are likely also needed in the House in order to gain a majority. That increases their leverage in the negotiations.

Dreamers

The budget discussion is further complicated by migration issues. The status of dreamers (children brought illegally to the US) has been forced on to the agenda after President Trump in September terminated President Obama’s Deferred Action for Childhood Arrivals (DACA) from 2012. More than 700,000 people are covered by DACA, and their legal status in the US is now in doubt. There is broad agreement that “something” should be done (and strong backing in opinion polls), but disagreement on what “something” is. President Trump has sent mixed signals on DACA ranging from signaling a possible deal with Democrats in September to the current hardline stance. The dithering is a reflection of a push from conservatives (also within the White House), who view all concessions on migration as a betrayal of important campaign promises.

President Trump wants funding for his border wall included in the 2018 budget. Democrats wants a solution for dreamers included – but refuse to fund a wall (although they can support other security-enhancing measures). Importantly, Democrats are now more worried about a backlash from the progressive wing on migration than being cast as soft on defense by Republicans.

Health care, debt ceiling and trade

While not facing deadlines in January, both a stabilization of the health-insurance market and raising the debt ceiling are on the legislative agenda. The private health-insurance market suffered a setback in October, when President Trump terminated a program aimed at subsidizing health insurance for low-income Americans. This was further amplified by the termination of the mandate to hold health insurance in the tax reform. Senator Collins (R-ME) has made fixing this a priority, but it remains to be seen if the bipartisan solution already tabled (Alexander-Murray plan) can gather enough support.  The longer-term funding for the children’s program CHIP also needs to be addressed before March. The same goes for the debt ceiling; the Treasury has already started using “extraordinary measures” to pay the bills.

President Trump will announce a big infrastructure plan later this month, but that is seen as dead on arrival in the current political climate. He also has to make a decision on whether to levy tariffs on certain goods from China, and could pull out of the ongoing NAFTA-negotiations. While trade measures do not require congressional approval, particularly a NAFTA withdrawal could consume considerable oxygen in Congress.

 

A big, beautiful deal?

Under normal circumstances, it should be posssible to reach a fairly broad agreement on the many related items. However, conservatives worry that attempts to reach a deal with Democrats will include compromises on DACA, border security and military spending. And they are right. That is also why they want to keep the issues separate. Naturally, Democrats seek a big package dealing with as many items in one go as possible.

In the end it comes down to President Trump. If he aims to please his political base and takes a hard stand, dysfunction and a government shutdown will follow. If he chooses to show flexibility, Republicans can showcase their ability to govern, but also risk alienating the hardliners on the right.

I expect a deal on the budget, debt ceiling and dreamers to be reached in late February. Some border wall funding could be included, but likely camouflaged as upgrades to existing structures. A deal is likely to be followed by measures to calm rightwing fury such as an intensified effort to deport illegal immigrants and new trade cases. The reason I expect the two sides to come together is not because of a sudden outbreak of bipartisanship, but rather because the tax cuts take effect in February. A shutdown would muddle the Republican narrative.

The latest budget outlook from the Congressional Budget Office (from June 2017) assumed a deficit of USD563 billion in fiscal-year 2018 (up from USD666 billion in fiscal-year 2017) based on current law, which includes the spending caps. The tax cuts are estimated to add USD136 billion to the baseline deficit in 2018, while the current spending plans, including disaster relief, add another USD100-150 billion. Even with higher economic growth, the deficit is likely to surpass USD800 billion in 2018.

 

All about the midterms

Washington politics is now all about the mid-term election (with some Russia investigation and Steve Bannon thrown in). In February-March, Republicans will know whether they stand to benefit politically from the tax reform. It is already noticeable that the current very high household optimism has not translated into support for the governing party; Democrats expanded the lead in generic congressional polls during December.

Retirements is an important part of the midterm puzzle as it is always easier to win a district without an incumbent member. So far 25 members of the House of Representatives have announcement retirement – 18 Republicans and 7 Democrats. In the Senate, Utah’s Orrin Hatch announced his retirement this week. Hatch has been a staunch supporter of President Trump and steered the tax reform through the Senate as head of the Finance Committee. Utah is not Alabama and his replacement will be a Republican. However, it could be Mitt Romney, who is probably the strongest establishment voice in the Republican party. That would not only add flavor to Republican domestic disputes, but could also throw open the 2020 Republican presidential primary. Not a favorite prospect for President Trump or the alt-right media.