Business

When will debt ax fall?

President Obama and Republicans in Congress are headed for another standoff over the national debt.

But first, they need a deadline.

The Treasury Department now has free rein to finance the federal government through borrowing, with the ceiling that limits the total debt suspended until March 15.

{mosads}On that date, the debt ceiling will again take effect, and the overall limit will be automatically raised to cover all of Treasury’s borrowing. Analysts expect the increase will amount to roughly $1 trillion, pushing the debt limit to over $18 trillion.

“Anything that happens before the debt limit is reinstated just goes on the tab,” said Shai Akabas, associate director of economic policy for the Bipartisan Policy Center.

Once the debt ceiling is back in effect, Treasury will only be able to pay the government’s bills with money that is coming in, as well as by shifting funds from less essential programs in what is known as “extraordinary measures.”

Just how long those “extraordinary measures” will last is anyone’s guess, with a solid run of economic gains perhaps giving Treasury more breathing room — and lawmakers more time to battle over a legislative solution.

“We don’t expect an increase to be needed before the summer, and it could go quite some time beyond that,” Akabas said. “It’s hard to put an exact figure on it.”

Both Obama and the Republican Congress insist they have no interest in repeating the drama seen in the summer of 2011, where a last-minute increase in the debt ceiling prompted the first downgrade of American debt in history.

But with few “must pass” bills awaiting the new Congress, some Republicans are likely to see the debt-ceiling bill as leverage to force Obama into accepting spending cuts and changes to entitlement programs such as Medicare and Social Security.

Rep. Tom Price (R-Ga.), the new chairman of the House Budget Committee, suggested last year that the GOP might consider requiring that any debt hike be matched by equivalent spending cuts, a standard that was pushed by Speaker John Boehner (R-Ohio) in 2011.

“I think it was wise, we kind of fell away from that,” Price said of the “dollar for dollar” rule. “Anything that gets us further in the direction of true reform to save and strengthen your Medicare Medicaid and Social Security is a wise thing for the country, but it also helps us from a debt and deficit standing.” 

It remains an open question when the debt ceiling will return to the forefront of the political debate, but budget analysts say the deadline is likely to be in the summer or early fall.

Generally speaking, a good economy pushes back the deadline for a debt hike. When Americans are taking home bigger paychecks and spending more money, the government takes in more revenue to cover the bills and Treasury’s “extraordinary measures” last longer.

A growing economy also moves more people from government programs, lowering the costs of programs such as food stamps and unemployment insurance.

Still, the way lawmakers agreed to structure the recent debt-limit deals could mute the impact of the economy’s growth.

In previous years, policymakers typically agreed to increase the nation’s borrowing limit by a set dollar amount. But the last few times, Congress has opted instead to suspend the debt limit for a prescribed period of time, with the new borrowing automatically approved retroactively.

The strategy carries political appeal, as it allows lawmakers to avoid default without having to vote on a multi-billion dollar increase in the national debt.

The Treasury Department benefits from the tactic as well, as it gives officials a specific date to plan around, as opposed to having to track debt accumulation until a new increase is needed.

But it also means that the strength of the economy in the days after March 15 — rather than before — will decide when a new debt hike is needed.

Still, barring some unforeseen event, it appears unlikely the debt limit fight will drag into 2016, when presidential primary politics will be in full flower.

“I don’t want to rule anything out, but based on the numbers … it looks like it is going to stay in 2015,” Akabas said.