Time running out on debt-ceiling time bomb
The best time to raise (or, better yet, eliminate) the federal debt ceiling was yesterday. The second-best time: today.
Our alarmingly complacent Congress instead behaves as though the task can be left to some faraway tomorrow. Unfortunately, that tomorrow might arrive much quicker than lawmakers realize.
The debt limit is the amount Uncle Sam can legally borrow to pay off whatever bills past Congresses already committed to. It is unclear exactly when the federal government might exhaust all available tools for meeting these obligations in full and on time.
Among the very bad consequences of a potential default: a violation of the Constitution; difficulty fulfilling basic government functions, such as paying out Social Security benefits and military salaries; and higher borrowing costs for the U.S. government, which would lose its reputation as the safest of safe borrowers.
Also, perhaps a global financial crisis.
Lawmakers have assumed their deadline to act was the third quarter of 2023, at the earliest.
But the projection for when we would hit the ceiling, calculated by the Bipartisan Policy Center, was released this past June. There have since been several major economic and policy developments that might move up the drop-dead deadline.
First, inflation has persisted at high levels for longer than expected, which has prompted the Federal Reserve to raise interest rates more aggressively. Fed Chair Jerome Powell has also signaled that the central bank might continue raising rates until they reach a higher final level than had previously been projected.
Higher interest rates make it more expensive for everyone to borrow, Uncle Sam included. This would drive up federal debts more quickly.
Second, the economic outlook has darkened considerably in recent months. Economists surveyed recently by the Wall Street Journal put the chances of a recession in the next 12 months at 63 percent, up nearly 20 points from their
June predictions. Some other major economies have already likely entered recession, which could spill over into the United States.
This, too, would lead the federal government to accumulate debt more quickly, because of how recessions affect both sides of the ledger.
During economic downturns, tax revenue generally falls because people and companies make less money and so end up paying less in taxes. Additionally, even if Congress doesn’t pass any additional relief or stimulus bills, federal spending obligations are likely to rise. That’s because job losses make more people eligible for safety-net programs such as unemployment benefits, food stamps and Medicaid.
(To be clear, it’s a good thing that various forms of aid kick in automatically when people are suffering, given how dysfunctional and slow Congress is. Unfortunately, the debt ceiling does not also automatically adjust to changing macroeconomic conditions.)
There’s also the extension of the student loan repayment pause.
This forbearance program began in March 2020, when
Donald Trump was president, and has been extended many times.
When the Bipartisan Policy Center released its most recent “X Date” projection for when we’ll stop being able to pay all our bills, the pause had been scheduled to end on Sept. 1. So that was the date the center had used in its calculations, according to economic policy director Shai Akabas.
President Joe Biden then extended the payment freeze until Dec. 31 — and then to June 30 in response to recent court decisions blocking the administration’s (separate) debt forgiveness program.
This, too, would mean less revenue flowing in.
“The bottom line is that I would not be surprised if, on net, the situation has deteriorated somewhat from when we made our projection this past June,” Akabas told me.
How much earlier Uncle Sam might run out of cash remains unknown. The Bipartisan Policy Center is waiting to announce a new projection until the Congressional Budget Office releases a new budget baseline in January.
Meanwhile, senior Republicans in Congress have threatened to take the debt limit hostage next year, when their party regains control of the House. Republicans have pulled similar stunts before, leading the country dangerously close to default. Since then, the GOP has become even less tethered to reality, and with its razor-thin majority, each and every nut job will be even more empowered to tank the economy unless the entire Congress and Biden accept their demands.
All of these factors argue in favor of addressing the debt limit sooner rather than later — ideally during the lame-duck session.
Unfortunately, leadership in both parties has thrown cold water on that plan. In a recent interview, Rep. Hakeem Jeffries, D-N.Y., who’s expected to soon lead his caucus in the House, was noncommittal about whether Democrats wanted to raise the debt limit before the power handoff. Senate Minority Leader Mitch Mcconnell, R-KY., recently said the issue would probably not be addressed until “sometime next year.”
Meanwhile, the clock on this time bomb is ticking — and speeding up.