The House GOP elected Mike Johnson (R-LA) as Speaker on a unanimous basis and attention will turn to the fiscal impact as lawmakers refocus on appropriations, emergency supplemental spending, and the longer-term debt strategy. Our initial view is that a continuing resolution extending government funding beyond Nov. 17 appears more likely than not, and the question will be whether Congress can fund the government by January’s trigger date of a one percent across the board cut to government spending.
Johnson’s tenure may prove more stable given his established conservative credentials that can keep the right wing in his camp and moderates overall likely being less inclined to destabilize House leadership with a motion to vacate. This dynamic will place specific pressure on the defense funding agenda as the emergency national security supplemental makes its way through Congress with a first test of the new House-Senate policy dynamic.
Johnson’s election clears the way for movement on a CR as appropriations battle advances. Initial indications are that Speaker Johnson favors a new continuing resolution through January 15 or April 15 in order to give the House time to establish a negotiating position on spending bills with the Senate. The January timeline will be watched for the triggering of an automatic one percent reduction in spending across the board, however, we view this as more of a false deadline as the cuts will not be implemented until April 30. Uncertainty around the level of 2024 spending may drive some market concern, but would be misplaced in the macro sense, in our view.
Regardless of the ultimate spending level in FY2024, the built-in distribution of federal stimulus across the infrastructure bill, Inflation Reduction Act, Chips and Science funds, and potential emergency defense supplementals will maintain federal spending above baseline levels. Markets may also begin to evaluate the potential impact of a bipartisan debt commission as proposed by Johnson. A similar commission in 2011 ultimately led to a cut in government spending and a revival of a commission will be watched for deeper cuts than markets have anticipated. However, as we discussed, the built-in fiscal spend through other legislation will be a longer-running factor that can balance out any new reductions implemented by Congress.
House and Senate may be headed toward a showdown over emergency supplemental defense spending. Johnson’s noted skepticism of continued U.S. security funding for Ukraine’s defense will raise new doubts on whether a full-year supplemental funding package for Ukraine can advance under new House leadership. On this point, we note that Senate Republicans have increased their public support in favor of the Biden administration’s strategy to advance a comprehensive package covering Ukraine, Israel, and Pacific defense needs along with addressing border security measures. The key question will be whether the House opts to split Ukraine aid from current discussions, or if Ukraine will be tied to border policy changes as negotiating leverage.
Overall, we see Johnson’s election as prolonging the process but not necessarily diminishing the prospects of an expansive supplemental defense package passing into law. The ability of Congress to reach a deal on border policy changes will be a factor to watch, as will any pressure applied on Johnson on defense spending from the more moderate/defense-oriented GOP House members. Our outlook on how defense funding can make its way across the finish line is available in our previous note: Defense Funding Outlook: Expert Takeaways and Path Forward
Can Johnson maintain the Speaker’s chair? Our initial read is that Johnson’s tenure may prove to be durable as we look into 2024. Johnson is a relatively unknown figure with little political baggage which may allow him more leeway in navigating contentious issues. Johnson’s path to the Speakership saw buy-in across the entire GOP conference, and for the time being he appears to be on stable footing with the faction that challenged Speaker McCarthy’s position.
Johnson’s dynamics with the more moderate wing and defense-oriented lawmakers will be a factor to watch. We expect more information will emerge in the coming days if any assurances have been given to those prioritizing emergency defense spending, or if Johnson avoided the deal-making dynamic altogether, which would be a negative for new defense funding prospects. We are less likely to see more moderate members challenge Johnson’s leadership position if policy disagreements emerge, in our view.
Impact on GOP fundraising operations may be difficult to reverse from a 2024 perspective. One of the major responsibilities of the top party official in the House and Senate is to fundraise in support of their members. Republican leader Kevin McCarthy and his affiliated entities raised over $400m last cycle and was already off to a strong start as Speaker this cycle.
As a result of McCarthy’s removal, fundraising was halted. New Speaker Mike Johnson has not shown himself to be a strong fundraiser up to this point averaging only about $2.5m per cycle thus far. The institutional structure will assist him in fundraising; however, this lost time will not be able to be made up. This could make it more complicated for Republicans to maintain their House majority.
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