Rising debts threatens US recovery
The nation’s debt ceiling once again looms as the spark to congressional brinkmanship that could threaten the slowly recovering economy.
The Treasury Department said Thursday that the US probably will hit its $16.4-trillion borrowing limit by the end of the year, at the same time that Congress will be grappling with the automatic tax hikes and large government spending cuts scheduled to kick in January 1.
“It adds to the caldron of the dark brew,” Mark Zandi, chief economist at Moody’s Analytics, said of the fastapproaching debt limit. “That makes the disaster more disastrous.”
The Congressional Budget Office and most economists predict another recession in 2013 if the confluence of tax increases and spending reductions known as the fiscal cliff takes place. And straying too close to the debt limit — not to mention hitting it — probably would lead to a second downgrade of the US credit rating. In mid-2011, a bitter standoff over the issue led to the first credit revision. The Treasury said Wednesday it could take “extraordinary measures” to juggle the nation’s finances to give Congress and the White House more time to work on a debt-limit increase. But even those steps — essentially a series of accounting manoeuvres — would buy only into early 2013 before the government faced a possible default. As of Tuesday, the US debt was $16.165 trillion.
“I think that, as we saw last sum- mer , it’s important that the debt limit is raised in a timely manner, but really that’s in Congress’ hands,” said Matthew Rutherford, assistant Treasury secretary for financial markets. It was the agreement then to boost the limit that created the $1.2 trillion in automatic spending cuts that are part of the fiscal cliff. The other part is the expiration of the George W. Bush-era tax cuts.
Lawmakers and President Obama will try to deal with the fiscal cliff after next week’s elections. The debt limit will probably be addressed then as well, although it has not yet been the focus of Democrats or Republicans. House Speaker John A. Boehner (Republican from Ohio) said in May that he had a simple principle for raising the debt limit — any increase must be offset “by spending cuts and reforms that exceed the amount of the debt limit increase.”
“No decisions have been made on timing, but the speaker’s principle — that spending cuts and reforms must exceed any debt hike — will have to be met,” Boehner spokesman Kevin Smith said Wednesday.
A White House spokeswoman declined to comment. Federal Reserve Chairman Ben S. Bernanke and Christine Lagarde, head of the International Monetary Fund, have warned about the negative ramifications for the US and world economies if the debt limit is not raised.
But the rising limit has become a focus of conservatives, who point to it as evidence of the nation’s spiralling budget deficits.
Representative Tim Huelskamp ( Republican from Kansas), a Tea Party freshman, voted against the 2011 debt-limit deal because he said it didn’t cut enough government spending.
“The Treasury’s predictions are no surprise, as we have anticipated hitting the debt limit right around or before the time any actual cuts from the debt deal take effect,” he said.
“Every day that goes by without a change of course in Washington is another $4 billion added to our debt. Is that the legacy we want to leave our children?”
The brinkmanship leading up to the mid-2011 debt limit increase caused Standard & Poor’s to downgrade the US credit rating for the first time, to AA+ from the highest level of AAA. The Government Accountability Office estimated recently that the delay in getting a debt-limit deal cost taxpayers an additional $1.3 billion in borrowing costs for the fiscal year that ended September 30, 2011.
Part of the debt-ceiling deal provided that the automatic spending cuts — half from defence, half from domestic programmes — would occur over the next decade if Congress and the White House could not agree on a broader deficit-reduction plan. After the US technically hit its then $14.3-trillion debt ceiling in May 2011, the Treasury was able to delay the effect for about 12 weeks through manoeuvres such as borrowing from two federal employee pension funds.