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A hot autumn lies ahead for US political action: debt ceiling, spending law, budget and tax reform will test the internal balances of the Republican Party and relations with the Administration.  US labour market: still full steam ahead.  ......

On 5 September, the US Congress will reopen after the summer recess, with a busy agenda full of obstacles. Time is short to achieve tangible results, after nine months of legislative stall and the health reform setback. Two issues are particularly urgent: the debt ceiling and the appropriation bill for the next fiscal year. Failure to obtain results on these issues by the end of the month would lead to a government shutdown in early October. The risk is high, as there are only 12 working days in September in which both houses of Congress are open. Trump’s threats related to the wall with Mexico are of no help, either. Tax reform is the other issue lying large ahead in the Fall, requiring also the approval of a budget by the House and Senate. 

Debt ceiling. The debt ceiling has not been raised since end-2012. Since then, Congress has suspended and “reset” it several times, to avoid politically hard fiscal adjustments. At the end of the suspension periods, the debt limit is reset, adding to the original limit the amount of debt issued during the suspension. The latest suspension expired in March 2017, and since then the Treasury has resorted to the, now usual, extraordinary measures to temporarily work around the limit. The CBO estimates that the measures will be exhausted in early October.

There are now two plausible alternatives:

1) raising the limit, with or without restrictions;

2) suspension for 2 or 3 months, or for around 2 years, to implement the tax reform and go past the 2018 vote). Moreover, a favourable vote by at least 8 Democrat senators will be required.

The likely outcome is either a “clean” increase, with no spending restrictions, or a suspension, even though short-term rates are already pricing in the risk of a shutdown. 

Appropriation bill for f.y. 2018. The risk of a government shutdown due to a failure to approve a new appropriation bill is greater than that tied to failure to raise the debt ceiling. The current spending law will expire on 30 September, and needs Democratic votes in the Senate to be extended. The Republican leadership has signalled its will to extend the current law without introducing conflictual changes, but the President has threatened to veto any appropriation bill that does not include at least 1.6 billion dollars to fund the building of the wall with Mexico. Our baseline scenario is a non-traumatic solution, i.e. the extension of the appropriation bill with no funding for the wall. The limited time and Trump’s threats are non-negligible risks, with potential impact on short term interest rates in the next few weeks. But the need to finance reconstruction in Texas may facilitate the passage of a spending law.   

Tax reform will be the autumn’s main battleground, and provide the base for the 2018 midterm elections platform. On 5 September, the administration will meet the republican leadership to decide the features of a preliminary plan, to be submitted to the relevant committees in Congress. The size and distribution of the tax cuts remain uncertain (and controversial), as also the related funding sources (elimination of deductions, spending cuts and/or higher deficits, taxation of firms’ foreign profits). A swift solution is difficult, as seen with healthcare, in the absence of a compact republican majority. In our baseline scenario, an expansionary reform will be approved, funded in part via higher deficits. The risk is that, to deliver results by year-end, the measures may prove to be closer to a (temporary) tax cut than a broad reform. The impact should in any case be moderately growth-supportive on 2018.

The August Employment Report was solid, even though a little disappointing (non-farm payrolls +156k, unemployment rate at 4.4%, hourly wages +0.1% m/m). August data are often weak and are later revised upwards, so they must be read with caution. In any event, August results are in line with full employment and, based on the data so far, a fed funds hike in December cannot be ruled out. Inflation will be the crucial variable for the Fed in the Fall.


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