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You can never be absolutely certain a bill has gone down to final defeat in this Republican-controlled Congress, but it certainly looks, as of late Tuesday night, that the Republican effort to repeal and  replace  Obamacare  has died in the Senate–and that a hasty effort to simply repeal the Affordable Care Act and substitute a promise to replace it with something within the next two years has gone down to defeat as well.

That leaves the Senate and the House to move on to the next big items on the Republican agenda–a budget for the Federal government for the fiscal year that starts in October and a plan for a massive tax cut.

In fact, one of the main reasons that I think the Republican health care bills are actually dead is that neither the budget nor those tax cuts could move ahead until the health care legislation was out of the way. That’s because the Republicans–in an effort to pass a bill with just Republican votes–had to rely on a process called reconciliation in order to avoid a potential Democratic filibuster in the Senate. Under the rule of the reconciliation process, the Republicans could pass their plan with just 50 votes–plus a tie-breaker vote cast by Vice President Mike Pence–instead of needing to gain 60 votes to shut down a filibuster.

Reconciliation is a once obscure legislative process that has become all too common in these days of legislative gridlock in Congress as the only way to get anything done. And going forward the rules of the reconciliation process will determine how quickly–and if–the Republicans can move their proposals for a budget and for tax cuts through Congress and onto President Trump’s desk for his signature.

So how will reconciliation shape the calendar and the result?

Here’s how reconciliation would work with the fiscal 2018 budget.

First, Congress passes a budget resolution containing “reconciliation instructions” telling congressional committees how much they need to change their revenue and spending to conform to a new budget resolution. The committees’ responses are then bundled by the House and Senate budget committees into a single reconciliation bill for consideration in each chamber. The House Republican majority can set pretty much whatever rules it wants for passing a bill by reconciliation by adopting a special rule. In the Senate, crucially, reconciliation bills are subject to special rules that limit debate to 20 hours (thus avoiding a filibuster) and that allow the bill to be passed with a simple majority of 51 votes. (There are 52 Republican Senators.)

There is, however, one huge additional hurdle in the Senate. Passing the bill requires only a simple majority in the Senate–if the bill is free of points of order. Any member can raise a point of order against a reconciliation bill if it violates the spending and revenue targets in the budget resolution or other budget rules.  Among those rules are limits that Congress passed on defense and entitlement spending. And, in the Senate, the so-called Byrd rule, which generally disallows items that do not affect outlays or revenue. The Byrd rule also prohibits initiatives that would increase the deficit beyond the fiscal years covered by the budget resolution.

What that means in effect is that Republicans can’t attach non-spending items to the budget bill. Which doesn’t mean that the budget bill won’t contain a lot of Republican priorities. They will just be presented as measures to reduce spending. As I understand it, for example, a budget bill couldn’t simply prohibit the operation of Planned Parenthood, but it could cut funding for that organization. Same with the Dodd-Frank financial industry regulations. A budget bill passed under reconciliation could not simply repeal that legislation. It could, however, kill parts or all of that legislation as part of an effort to reduce government spending. So expect to see a budget bill with lots of measures to roll back regulation and set social policy in the guise of spending reductions. If the history of the Republican health care plan is any indication, these add ons won’t make passing a budget easy in the Senate. And conservatives in the House might balk at a budget that doesn’t include enough of these initiatives.

And the reconciliation process also means the the budget has to be in balance for the years covered by the budget.

The draft budget blueprint produced by the House Budget Committee and that is set for a committee vote on Wednesday, July 19, raises defense spending steadily over the 10-years of the budget. To get the budget into balance as the reconciliation rules require, the committee plan assumes that the U.S. economy will grow by 2.6% a year–that’s lower than the 3% in the White House budget outline but well above the 1.9% figure projected by the Congressional Budget Office. Even with that assumption of higher growth–and the higher tax revenues that growth will bring in–non-defense discretionary spending would fall to $424 billion, a huge drop from the $554 in non-defense discretionary spending this year. The committee plan proposes cuts to Medicare, cuts to spending on regulating the financial industry, cuts to benefits for federal employees, cuts to welfare spending, and more. You can’t cut $13o billion in non-defense discretionary spending without cutting everywhere.

The spending levels in the budget bill will, if passed, determine the shape of the next big item on the Republican agenda, tax cuts/tax reform. Since that too will have to be passed using reconciliation, the tax bill would require big cuts to government spending in order to make those tax cuts revenue neutral from the figures in the budget plan–even with the higher growth rates (and higher tax revenue) that the bill assumes would result from these tax cuts/tax reforms. House committees would be tasked to find those cuts in the programs that fall in their bailiwick. The Ways and Means Committee, which is drafting the tax bill, would have to find $52 billion in deficit savings over the coming decade in programs such as Medicare, disability payments, and unemployment compensation. The Oversight and Government Reform Committee would have to find $32 billion from cuts to the federal workforce and to benefits for federal workers. The Financial Services Committee would need to find $14 billion in cuts–probably from repealing all of parts of Dodd-Frank. The Judiciary Committee would be responsible for $45 billion in cuts. That’s roughly the savings produced by the Protecting Access to Care Act, a medical malpractice reform bill that passed the House last month.

It remains to be seen if the legislation required to produce those cuts could get through the Senate.

And it also remains to be seen if there’s enough unity on the Republican site of the aisle to pass something like the House Budget Committee plan. The ultra-conservative members of the House Freedom Caucus, who killed the first effort at repeal and replace Obamacare in the House, want bigger spending cuts than the $203 billion in the budget plan.  Moderate Republicans in the Tuesday Group, on the other hand, have argued against those $203 billion in cuts.

And then, there’s also the damage on intra-party generate during the health care battle. Many conservative Republicans in the House feel that House leadership led them on by promising changes in the bill that leadership didn’t finally deliver. This time around they’re demanding to see details of the tax cut plan before they vote on a budget.

All this has to fit into a relatively narrow legislative window–that also must allow time for the Republicans to work through their deep divisions over raising the debt ceiling before the Treasury runs out of the ability to pay the government’s bills. The latest estimate on the deadline for raising the debt ceiling from the Congressional Budget Office is that Congress must act by mid-October. That would seem like plenty of time excerpt that Congress is scheduled to take all of August off. There are actually only 26 scheduled working days before October 15.

What does all this mean for investors and financial markets? The repeal and replace debacle has left increasing numbers on Wall Street wondering if the Republicans, despite control of Congress and the White House, will get anything done on the party’s major agenda items. JPMorgan Chase (JPM) CEO Jamie Dimon, for example, sputtered with frustration over Washington during his bank’s earnings announcement on Friday, July 14. Some of the hope for deregulation that has helped fuel the rally in the financial sector, for instance, has started to seep out of the markets. The effect, however, is likely to be more powerful where it is most defuse. A general pessimism that Washington will, again, get nothing done isn’t a plus for financial markets. Especially if one of the things that Congress can’t get done is a big tax cut.

The Federal Reserve is among those watching developments most closely. The Fed began the Trump administration fearing that it would produce fiscal stimulus just as the U.S. economy was starting to heat up. That would require more interest rate increases on a more aggressive schedule from the Fed in order to keep inflation under control. Now that it looks like that fiscal stimulus either isn’t going to happen–infrastructure spending–or is in question–the tax cuts–the Fed has more time to wait and see. At least that is what the financial markets have currently decided to believe. That read of the Washington scenario is one reason why the odds on a Federal Reserve interest rate increase now favor March 2018 versus December 2017.

The chaos in Washington over the budget, tax cuts, and the debt ceiling also figures into the Fed’s thinking on when it might start to reduce the size of its asset portfolio. There’s an increasing argument, I think, in favor of the likely Washington political calendar pushing the Fed to start trimming its balance sheet at its September meeting in order to get ahead of any legislative insanity.

More on the argument for a September move to reduce the size of the Fed’s $4.5 trillion balance sheet in a post later this week.