🔮New Deal in Reverse?
Are Republicans Hitting the Third Rail of US Politics?
This week we’re back in a familiar spot: if Congress doesn’t pass a funding deal by Friday, Federal funding will lapse, which will result in a government shutdown unless reversed quickly.
Odds for a funding lapse by March 15 have fallen from the high 70s in recent weeks to just 35% today. What happened?
Inauguration: Odds for a shutdown began to rise following Trump’s inauguration. The first spike came on Jan 22 with Trump’s federal hiring freeze and rose through early February with the attempted closure of USAID (🔮 20% odds it shuts entirely by end of April).
Schumer Leverage?: Democratic Senate leader Chuck Schumer spiked odds to 80% on February 10 with talk of a shutdown as leverage to fight back against Trump’s spending cuts. But Senate Dems have since cooled on this, fearing a shutdown could backfire by pressuring even more Federal employees to quit.
House Deal: Republicans in the House have made progress on a budget, passing a budget resolution on February 13 that calls for $880b in cuts over the next ten years. Multiple House members have come out against some of the proposed cuts, which could be contributing to the lingering uncertainty.
These events reveal the key drivers of the situation:
Trump / Musk Agenda: Looking to take a bite out of the $36t US debt by reducing the scope of the Federal government, a policy that historian Niall Ferguson compares to the New Deal, but in reverse.
Senate Dems: Republicans need 60 votes in the Senate to pass the budget, but only have 53 seats, giving Dems a blocker if they care to use it.
House Republicans: Republicans have a 219-215 effective majority in the House, meaning they can only afford to lose a handful of votes if they want to pass the deal.
What’s On The Table?
Since the start of Trump’s second term, debate has swirled around his intentions on the Federal budget.
Are the DOGE moves intended to axe items that are lib-coded but don’t make up a lot of spending, such as USAID and DEI? Or is he serious about cuts to areas that would truly make a dent: healthcare, Social Security, and defense?
Looking at several markets together gives us a picture of where things stand:
Medicaid. Most likely to be cut (🔮 59% odds), is Medicaid. This health program for low-income Americans cost $592b in 2024, or about 9% of the Federal budget. The Republican budget does not explicitly call for Medicaid cuts but does task the Energy and Commerce Committee, which oversees Medicaid, with finding a large amount of the savings.
A CBO report released on March 5 stated that reaching the $880b target would require cuts to Medicaid, which spiked the odds for Medicaid cuts on Polymarket.
Medicare. The CBO report also spiked odds of cuts to Medicare, the healthcare program for seniors which made up $848b of the Federal budget last year.
Trump has pledged multiple times not to cut Medicare, but Republicans have been speaking about trimming “waste, fraud, and abuse” from both health programs, and the market seems to be reading between the lines here.
Defense. What about the military, which was $850b of the 2024 budget? Odds for defense cuts this year spiked as high as 47% on reports that Pete Hegseth ordered Pentagon officials to prepare for cuts. But the latest House budget, actually calls for a $6b increase in military spending, which calmed the market significantly.
Social Security. Despite Democratic warnings, Social Security, the $1.4T third rail of American politics, is the least likely of all major programs to be cut - just 9% chance for cuts by July. This market has also been the least volatile of the bunch, indicating it is likely truly a sacred cow.
Balanced Budget? Will all these cuts balance the budget? Almost certainly not: there’s only a 7% chance DOGE balances the Federal budget this year.
In fact, the 2025 DOGE cuts market is seeing <$50b in cuts, the lowest bracket, as most likely.
Sticking Points
With Senate Dems cooling their shutdown threats, the biggest sticking points are within the Republican party itself.
In the House, Mike Johnson is caught between budget hawks and members from states with higher numbers of Medicaid recipients.
For example, Tony Gonzales (R-TX), Jeff Van Drew (R-NJ), and Nick Begich (R-AK) have all voiced opposition to Medicaid cuts, although it does not look like any of them are prepared to vote down the package.
What about the Big Guy? Trump recently truth’d his support for the Republican funding bill but has not been super involved in the budget process.
If history is any guide, he could threaten to torpedo the deal in exchange for last-minute concessions. For example, the longest government shutdown in US history (35 days) came during Trump’s first term when he refused to sign a spending bill that didn’t include border wall funding.
Elon Musk is the final wild card. The head of DOGE was reportedly reined in by Trump in a recent cabinet meeting, but he has a record of weighing in forcefully on budget issues.
As of now, there does not seem to be any single insurmountable obstacle ahead of the funding deal, but rather a handful of potential spoilers that could rear their heads during this week’s final negotiations.
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