Another Debt Ceiling Debacle Before The Election?
We may have to deal with the debt ceiling again before the November elections.
When Congress and the President finally reached a debt ceiling deal at the last minute back in August, the intention was that we would not have to relive the showdown we saw throughout the Summer of 2011 again before the 2012 elections. Now, however, it appears that there is a growing concern on Capitol Hill that we could have to deal with debt ceiling concerns before the Presidential election in November:
Last year’s torturous congressional debate over raising the federal debt ceiling eventually resulted in a deal that President Barack Obama and congressional leaders believed would keep the federal government funded through the 2012 elections. Not so fast.
In what one top congressional aide calls a “nightmare scenario,” the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking “extraordinary measures” to keep the government funded through November.
Barring a major economic shock — a financial meltdown in Europe, for instance — the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn’t do it. And if the Treasury does have to invoke “extraordinary measures” before the election, it’s easy to imagine a re-run of last year’s political circus, magnified many times over.
There are several reasons why the projections in August that the deal would be sufficient to get the nation past the 2012 elections may turn out to be wrong. The failure of the Super Committee means that several trillion dollars in expected long term deficit reduction are off the table, for one thing. For another, the extension of the Payroll Tax Cut, even with offsets, would still require the Federal Government to borrow money, thus adding to the total debt. And finally, there’s the fact that economic growth is not what analysts expected it to be back in August:
At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.
Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.
Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.
The good news, to the extent there is any, is that interest rates on new debt remain historically low so borrowing costs have not increased, although it’s unclear how long that will be the case if we continue to play games like this with the full faith and credit with the United States.
A debt ceiling fight right before an election would likely be a disaster. As I noted when we saw this last year, voting to increase the debt ceiling is the one vote that no member of Congress really wants to cast because it lays bare the Federal Government’s fiscal problems, and because it is easy for a political opponent to demagogue. Explaining why voting to increase the debt ceiling is, in reality, a fiscally responsible move because it means authorizing the government to pay for things that Congress has already authorized is hard. Denouncing a Congressman or Senator for voting to “raise the debt” is very, very easy and you can guarantee that this is exactly what we’d see in the event Congress had to vote on this issue before November. The debt kamikazes would be back in full force, and the world would be sitting back and watching while the United States argued down to the wire over an issue that shouldn’t even be in doubt.
Even if we manage to avoid a necessary Congressional vote before November, though, things are unlikely to be pretty. If Treasury has to start doing what it did last year to avoid the day of reckoning we’ll see the same rhetoric we did last time around. More importantly, though, whether it happens before the September elections or not, we’re going to have to deal with this issue again sooner rather than later either in a December 2012 lame duck session, or when the 113th Congress convenes next January. Whenever it happens, I doubt it will be handled any more responsibly than it was last year.