When Do We Hit the Debt Ceiling? Everyone's Favorite Guessing Game is Back
With yet another debt crisis approaching, it’s déjà vu all over again in Washington. So far, politicians have been successful in preventing complete financial chaos. This time, though, it could be too late to avoid a government shutdown.
As many of us have had to learn over the past two years, the U.S. Treasury has a statutory limit set by Congress on the amount of money it can borrow. This limit has existed for almost a century, but for the majority of its history, the legal ceiling for public debt has been raised as necessary without much of a bother. This all changed in 2011, when conservative Republicans, emboldened by huge gains made in the previous year’s midterm election, refused to raise the debt limit without massive spending cuts to the federal budget.
This started the now-familiar process whereby both parties bicker for months on end over where to cut spending, and by how much, only to hash out some temporary fix at the last minute. While both parties agree that the total amount of public debt is growing at an alarming rate, they differ on how to handle the problem. Republicans have demanded huge cuts to spending, while dragging their feet on tax increases. Democrats, on the other hand, insist on tax increases, and are reluctant to see cuts made to entitlement programs.
Thanks to the polarized atmosphere of Capitol Hill, negotiations have proved fruitless thus far. In the first fiscal showdown during the summer of 2011, a sloppy deal was finally struck at quite literally the last minute;, averting a shutdown by only a few hours. Congress was unable to avoid a round of sweeping across-the-board budget cuts known as sequestration earlier this year, which Congress itself had designed as a way of ensuring it tackled the problem of growing debt.
Though there have been some close shaves previously, this time around could see the government finally shut down. The latest stopgap measure to fund the government and avert a shutdown will expire on September 30. When it was revealed in July that the deficit shrank this year to $759 billion, down from over $1 trillion, economists predicted that the debt ceiling would be reached sometime in November. But Treasury Secretary Jack Lew announced Monday his forecast that the federal government will exceed the debt limit and become unable to pay its bills starting sometime in mid-October.
Currently, both chambers of Congress are on recess, which will not end until September 5. This leaves 16 working days in the month before the expiration of the stopgap measure which is currently funding the government. Even supposing that the legislature is able to do this, it must then raise the debt ceiling before October 11, when Congress goes on recess again, this time for a week. Because neither party’s stance has changed, it is doubtful that both of these deadlines will be met.
So why should we be worried about an imminent shutdown?
The U.S. economy is slowly regaining its footing, amidst a stormy environment for economies worldwide. Growth has stayed positive since the second half of 2009, and the S&P 500 has surpassed its previous record, even while the euro zone has been stuck in recession and China has experienced its own slowdown. But the International Monetary Fund has warned the U.S. that "the excessively rapid pace of fiscal deficit reduction" will endanger this weak recovery. When the sequestration cuts went into effect, the IMF cut its projection for U.S. growth in 2014 by 0.3 percentage points. A full freeze on government spending would likely wreak even more havoc. Were it not for this fiscal uncertainty, one could be cautiously optimistic about growth prospects for the country. But Congress remains the economy’s worst enemy.
Not only this, but a shutdown or default would cause pandemonium in the financial markets. Treasury bonds are seen the world over as a risk-free investment. If investors start to doubt the Treasury’s ability to make coupon payments on these bonds, yields will skyrocket, ensuring a credit crunch which could have the ability to throw the U.S. and other countries back into recession.
Congress has 16 working days to extend the stopgap, and another nine days to raise the debt limit in order to avoid this worst-case scenario. With little or no progress yet made at the negotiating table, we have never stood so close to the precipice.