There are two letters everyone outside of Washington should get used to hearing—”CR.” A CR, or a continuing resolution, is a short-term solution to major spending disagreements, and Washington is on the hook for one by September 30 (the fiscal year deadline), lest there be a government shutdown.

Odds of that shutdown have increased as the CR efforts by House Republicans are stymied by internal disputes, and, when passed, the bill will still need approval from the Senate and President Joe Biden. While passage of a CR is usually straightforward, an ultra-conservative group of Republicans known as the House Freedom Caucus has already voiced its opposition to a “clean” spending bill, unless its demands are met.

Several other measures nearing expiration are also subject to the September 30 deadline, including the Farm Bill, healthcare programs, the National Flood Insurance Program (NFIP), the Federal Aviation Administration (FAA) reauthorization, and national defense policy.

As the House of Representatives focuses their efforts on CR negotiations and the Biden administration seeks approval on a $44 billion emergency supplemental funding request, September is set to wrap up with little legislative progress.

Spending Snafu

After a federal budget is proposed by the president, appropriations committees in both the House and Senate must decide how to allocate discretionary federal funds via 12 appropriations bills. By the time Congress broke for summer recess, the Senate Appropriations Committee passed all 12 bills with broad bipartisan support. The Senate will likely attempt to pass as many appropriations bills on the Senate floor as possible in September if there is time on the clock.

Any progress in the House, however, has been along party lines, and they have yet to vote on most of their bills. Given that appropriations bills must originate in the House, Speaker of the House Kevin McCarthy (R-CA) is holding the only bill that has passed—the Military Construction and Veterans Affairs (MilCon) appropriations bill. McCarthy’s delay in passing it to the Senate effectively eliminates the opportunity for Senate Majority Leader Chuck Schumer (D-NY) to use the MilCon bill as leverage to stick the House with a CR on their terms. As the deadline approaches, McCarthy’s back is against the wall and he’s left pushing his ultra-conservative right flank and the House appropriators to pass all 12 appropriations bills so they have some standing when it’s time to negotiate with the Senate.

To date, the Senate’s topline numbers peg spending at the agreed-upon levels set in the Biden-McCarthy debt-limit deal. The House, on the other hand, has marked their topline numbers to lower 2022 spending levels. The gap between the two chambers is currently estimated at around $70 billion (including $14 billion in emergency funds) and could swell to as much as $190 billion if conservatives prevail.

When the House and Senate pass different bills, a conference committee is established in which both chambers forge a compromise before sending the final version back to their respective bodies for passage and then to the president’s desk.

Both sides of the aisle are aware that a CR will be necessary to buy appropriators more time, but divisions among House Republicans are also threatening that process. With conservative House Republicans demanding additional spending concessions, a compromise—as well as control of the speaker’s gavel—could be at stake. McCarthy is aiming to pass a CR through November, which would give appropriators a longer runway, but the potential stand-off in the meantime could have lasting consequences in the 2024 election landscape.

Same for the Supplemental

Amidst the appropriations battle, the Biden administration has also requested $44 billion in emergency supplemental funding. The request, made in August, includes $24 billion assistance for Ukraine, $16 billion to replenish the disaster-relief fund, and $4 billion to address border security and migration issues.

McCarthy has said he will negotiate offsetting the cost of any proposed emergency spending with cuts to other programs. But, as mentioned, the House Freedom Caucus has clearly voiced their opposition, demanding spending levels lower than agreed upon during the debt-ceiling standoff and dismissing any further aid to Ukraine. With disaster funding already in the red and the continuing crisis at the border, McCarthy may be forced to consider a revised version of the supplemental (sans Ukrainian aid) attached to a CR without the support of the conservative wing.

Playing Defense

Warnings from leaders at the Pentagon about the national-security implications of a shutdown are likely to increase if the government does experience a shutdown or a fiscal stalemate in the next few months. In the event that Congress does manage to avoid a shutdown with a CR, the Pentagon would also be subject to 2023 spending levels and wouldn’t be able to implement any new military programs unless exemptions are made by congress. The latter of which would require both time and compromise.

As previously noted, Biden’s growing foreign policy list contains a request for $24 billion in supplemental funding to assist Ukrainian war effort. Though the supplemental has bipartisan support in the Senate, there’s a growing faction of Republican opposition in the House as well as concern over blank check funding for Kyiv.

The National Defense Authorization Act (NDAA) authorizes annual funding and sets the policy agenda for the Department of Defense. Before Congress recessed for the summer, both the Senate and House passed versions of the NDAA, though the House’s version included controversial amendments pushed by the House Freedom Caucus. Lawmakers now need to reconcile the two bills in a conference committee and reach a compromise that garners support from both chambers—a challenging task considering the culture war amendments included in the House’s version. Congress has passed the NDAA for the past 60 years and 2023 could be the year that breaks that streak.

“Tech”-tonic Shift or Status Quo?

The Biden administration continues to pursue an agenda to rein in big tech, but the Federal Trade Commission (FTC) and the Department of Justice (DoJ) have only had limited success while suffering notable setbacks. Heading into the final quarter of the year, the administration will remain vigilant against dominant tech platforms, but prospects for success are highly uncertain as the DoJ goes to court in the Google search-monopolization case and the FTC preps an imminent antitrust lawsuit against Amazon.

There are several major policy-investment themes of critical importance to investors to watch in the next quarter:

• Rising regulatory concerns about tech leadership in AI have the potential to alter the market-growth trajectory of the leading cloud-service platforms (AWS, Microsoft Azure, and Google Cloud)
• Published estimates suggest Google pays Apple around $20 billion annually to remain the default search engine on Apple devices. The DoJ could threaten this practice as they consider outlawing such payments.
• The FTC is moving forward with an antitrust case that could undermine Amazon’s position as the dominant e-commerce platform
• The Supreme Court could strike down state laws limiting the discretion of social media to moderate content on their platforms
• The potential for a ban on TikTok still remains, but that effort is currently stalled on Capitol Hill

Permitting Reform

While the debt-ceiling deal contained modest policy changes to energy permitting, Congress will continue to work on reform in the coming months. Energy permitting reform is essentially all the environmental and technical approvals needed for major energy projects. Because the process in the US is complex, permitting reform is aimed at speeding up the wait times that energy-infrastructure projects are often subjected to.

In an instance of bipartisanship, members on both sides of the aisle in both chambers are hoping to get a more comprehensive deal. Republicans are striving to streamline the permitting process for the National Environmental Policy Act, and Democrats are focused on transmission issues, including enhancing the grid to allow for more renewable transmission.

The administration is also looking for a comprehensive deal, and we anticipate more pressure on Congress to move something. In the absence of a deal, the administration will attempt to use the regulatory process to advance its permitting agenda, including recently proposed rules from the Department of Energy and Council on Environmental Quality. Given the legislative schedule, any potential deal would likely need to ride on a must-pass piece of legislation.

Tech Policy in China

Though Biden’s executive order on US investments in Chinese companies was welcomed by many, some of the more hawkish members of Congress think that a tougher measure should be put forward. The order, aimed at restricting US investments in Chinese semiconductor, quantum-computing, and artificial-intelligence companies due to national security concerns, will likely see more attempts at broadening its scope. Schumer is hoping to pass a bipartisan legislative package addressing this policy, but prospects are growing dim given the lack of bipartisan cohesion. Congress may look to move several bills—either as standalones or attached to must-pass legislation—to address cybersecurity, drug trafficking, supply chain, and other China-related issues.

Crossing the Borderline

Immigration and the crisis at the southern border are likely to dominate agendas at both ends of Pennsylvania Avenue as well as in individual states. Here again, the House Freedom Caucus has been vocal about opposing any CR unless it includes significant border-security funding and the House GOP’s H.R. 2 border-crackdown bill. The border-crackdown bill would resume construction on the wall, tighten asylum standards, criminalize visa overstays, increase the number of Border Patrol agents, and more.

The Biden administration’s request for an additional $4 billion in supplemental border funding will likely not be sufficient in the eyes of the House Freedom Caucus and many other Congressional Republicans. These issues, coupled with the hardline immigration views of most of the Republican presidential candidates, will be a major factor in the passage of the CR.