Bonds

Speaker McCarthy floats GOP plan to claw back pandemic aid

House Speaker Kevin McCarthy, R-Calif., Monday told Wall Street that the House would advance a plan to avoid a debt default that’s conditioned on spending cuts and includes a larger budget proposal that claws back unspent pandemic funds.

“The longer President Biden waits to be sensible, to find agreement, the more likely it becomes that his administration will bumble into the first default in our nation’s history,” McCarthy warned during a high-profile speech at the New York Stock Exchange.

McCarthy’s speech comes as House Republicans and the Biden administration are deadlocked over negotiations to raise the $31.4 trillion debt limit, which the U.S. could hit sometime between June and late summer, according to the Bipartisan Policy Center.

The Treasury Department in January began taking extraordinary measures to avoid a default, efforts that did not include suspending the sale of State and Local Government Securities window, the measure most closely watched by the municipal market.

The White House Monday repeated its position that Congress pass a clean debt limit bill. “Speaker McCarthy is holding the full faith and credit of the United States hostage, threatening our economy and hardworking Americans’ retirement,” said White House press secretary Andrew Bates said in a statement. “There is one responsible solution to the debt limit: addressing it promptly, without brinksmanship or hostage taking, as Republicans did three times in the last administration.”

In his Wall Street speech, McCarthy said the House, which has a slim four-member Republican majority, would vote in coming weeks on a fiscal 2024 budget plan that would hold spending flat to 2022 levels. The plan would also claw back unspent COVID funds, which could total as much as $70 billion, according to an April 13 letter from the Republican Main Street Caucus, which includes 70 members.

McCarthy said the GOP plan would seek to “claw back tens of billions in COVID-related money.” The administration recently signed a bill to end the pandemic, the Speaker noted. “If the money was authorized to fight the pandemic but was not spent during the pandemic, it should not be spent after the pandemic is over,” he said.

Republicans, who over the past year have increased scrutiny and criticism of how some cities and states are spending their pandemic money, have not released detailed proposals for which pandemic aid programs would be cut.

The American Rescue Plan Act, passed in March 2021, featured $350 billion in Coronavirus State and Local Fiscal Recovery Funds. The funds must be obligated by December 2024 and fully spent by the end of 2026. Roughly 75% of the local government funding has been obligated, according to Brookings Local Government ARPA Investment Tracker.

Without offering details on timing or proposals, McCarthy said the Republican budget plan would raise the debt limit through May 2024, cap non-defense discretionary funding at fiscal 2022 levels, and limit budget growth to 1% annually over the next decade.

The speaker and Biden have met only once – Feb. 1, according to McCarthy – to talk about the debt limit. Biden has since said he wants to see a Republican budget plan before meeting again.

“I don’t know what we’re negotiating if I don’t know what they want, what they’re going to do,” the president said Monday.

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