The payroll tax package that Congress passed on Friday accelerated the timeline for another battle over the debt ceiling.
Last summer’s bitter clash over the debt limit took the nation to the brink of default, resulting in the first-ever downgrade of U.S. securities.
But a sequel to the debt-ceiling drama could be coming to Washington sooner than planned, thanks to the billions of dollars in deficit spending in the payroll tax agreement.
“There has been this sort of confidence that the existing debt limit would get us through the election. … It may turn out the timing is trickier than people had anticipated,” said Maya McGuineas, president of the Committee for a Responsible Federal Budget. “Anything that adds to the debt means that it moves the deadline up.”
The latest package extended the payroll tax cut for the rest of 2012, along with unemployment benefits and the current Medicare reimbursement rates for doctors.
The Congressional Budget Office (CBO) estimates that in the short term, the payroll package will add $101 billion to the deficit, which effectively erases a month of wiggle room under the $16.394 trillion debt cap. The government’s public debt currently sits at $15.39 trillion.
“Since this is not paid for entirely … in the short run, this is going to accelerate the debt ceiling,” said Steve Bell, the senior director of economic policy for the Bipartisan Policy Center. He said the government takes on roughly $100 billion of debt per month.
The Center now projects the government will hit the debt limit in January, rather than in the early spring, as had been estimated before the payroll package was approved.
The president’s fiscal 2013 budget proposal, released Monday, projected the government’s debt level would reach $16.33 trillion by Sept. 30, only $60 billion under the cap.
But Treasury Secretary Timothy Geithner told lawmakers Thursday he doesn’t expect to hit the debt limit until “quite late … significantly after the end of the fiscal year.”
Geithner’s estimate suggested that a vote to raise the limit could wait until after the election, and his timeline was not altered by the payroll tax deal, as the Treasury had previously assumed the tax cut would be extended for the remainder of 2012.
But the Treasury secretary also offered major caveats on the timing of the debt limit, given that the government’s borrowing timeline is largely dependent on the economy. Tax season has just begun, and the amount of receipts Treasury pulls in could move the timeframe forward or backward. Treasury was able to push back the debt limit deadline a handful of times in 2011 thanks to higher than expected receipts.
Another wild card is the potential for major shocks that could derail economic growth. Bell said a worsening of the European debt crisis, or a major disruptive event in the Middle East, could depress tax revenues and substantially speed up the arrival of the debt limit.
Even if the government were to inch up against the debt limit in the middle of campaign season, there is still some wiggle room to be had. Lawmakers haggled all the way up to the Aug. 2 deadline the last time they had to raise the debt limit, but the government actually reached that ceiling on May 16.
The government bought a few extra months of time thanks to a series of “extraordinary measures” the Treasury can employ when things get tight. And Geithner said Thursday that those options remain on the table the next time around.
However, it is not clear exactly how much time those measures would buy, especially considering the Treasury effectively exhausted them the last time around.
But even if the government can successfully navigate through the campaign season without bumping into the debt limit, even getting close to it could bring the issue back to the forefront, since Treasury is required to inform Congress when it gets close to the ceiling. Last year, Geithner’s initial warning came in January, eight months before the borrowing limit was raised.
If things hold to a similar schedule, the “meteor called the debt ceiling” could come crashing down at the height of the presidential election, Bell said.
At the very least, it looks like the debt limit will need to be dealt with during what could be an extremely busy lame-duck session following the election.
With fights looming over expiring income tax cuts and other tax provisions, as well as whether to replace the automatic $1.2 trillion sequester set to take effect in 2013, it could be a busy and contentious holiday season for the 112th Congress.