President Obama sacrificed an awful lot last year to take the debt limit off the legislative table until his second term, or some lucky Republican’s first term. More importantly, he wanted it off the table until after the 2012 elections, to prevent a replay of last year’s debt limit fight from playing out in the middle of election season, when the political consequences would be farther-reaching. And by “farther-reaching” we mean the doomsday scenario of legislators succumbing to a collective action problem and allowing the country to default on its debt.
Well, it looks like Obama will probably get his wish, but it will be an awfully close call.New figures from the Congressional Budget Office indicate that the government will hit its debt limit before the end of the year — though exactly how long before is still unclear.
CBO predicts that at the end of fiscal year 2013, the debt subject to the overall limit will be just shy of $16.8 trillion. But the debt limit itself stands at $16.4 trillion. The Treasury Department can create some breathing space for itself using a series of extraordinary measures — but those only go so far. So it’s still an open question how far into 2013 the current debt limit will take us — if it gets us there at all.
“There is a risk that the treasury will hit its $16.4 trillion debt limit before the next presidential inauguration,” emails Moody’s chief economist Mark Zandi. “It will be close. I suspect the Treasury will have enough accounting wiggle room to get there, but much depends on whether the economy sticks close to script.”
One plausible scenario, then, is that Congress will have to address the debt ceiling issue in its November-December lame-duck session. But that’s exactly when it’s expected to address huge issues, like the expiring Bush tax cuts and the automatic spending cuts locked in by the last debt limit deal. The outcomes of all those debates will hang heavily on the results of the election — a clean win for Obama portends a much different resolution than an Obama victory in which the GOP takes the Senate, let alone a GOP sweep.
Last September, when President Obama unveiled his jobs bill, Treasury officials still projected the debt limit wouldn’t need to be raised again by statute until February 2013 at the earliest. That may be less of a safe bet now.
Treasury aides did not immediately respond to requests for comment, but Jim Horney of the Center on Budget and Policy Priorities seems to think the administration’s safe.
I don’t think there is any indication that we are more likely to hit the debt limit this calendar year than had previously been thought. CBO estimates that the debt subject to limit will reach $16.002 trillion by the end of this September. That means an additional $392 billion can be borrowed before we hit the debt limit. Even with the somewhat higher deficit that will occur if we extend the payroll tax reduction and extended unemployment benefits without offsetting the costs in this year (it is unlikely, and not good economics, to offset the costs this year), it seems likely we will not hit the debt limit until early next year. And, of course, the Treasury does have some flexibility to stretch out the time by which the limit really has to be increased. So, based on CBO’s projections, I think it is unlikely that the limit will have to be increased before early 2013, but there certainly are things that could happen to change that assessment.
Needless to say, there’s already tremendous policy uncertainty written into law. The debt limit threatens to add another layer of complication to it.
Correction: This post originally reported that the debt subject to limit would reach nearly $16.8 billion by calendar year 2013. It has been corrected to note that CBO projects that level of debt by the end of fiscal year 2013. We regret the error.