WASHINGTON — Come January, should Congress fail to act, the United States will face more than immense tax increases and spending cuts. It will also run out of room to finance its large running deficits.
The Treasury Department expects the country to hit its debt ceiling, a legal limit on the amount the government is allowed to borrow, close to the end of the year. That would give Congress only a matter of weeks to raise the ceiling, now about $16.4 trillion, before sending financial markets into a panic.
Congressional leaders have made clear that the debt ceiling will be part of the intense negotiations over the so-called fiscal cliff, with many members unwilling to raise the ceiling without a broader deal. That has raised financial analysts’ worries of a financial market panic over the ceiling in addition to the slow bleed of the tax increases and spending cuts.
Congressional action is required to raise the debt limit. The Treasury can jostle payments for a few months. But expenses will eventually overwhelm revenue, putting the administration in the position of choosing which bills to pay. It might stop paying soldiers, for instance, or sending Social Security payments.
In 2011, Congressional Republicans would not raise the debt ceiling without a broader agreement to cut the country’s deficit and set it on a better fiscal path. The impasse over finding spending cuts and tax increases to do that led to the creation of the spending cuts on Jan. 1, the same time the Bush-era tax cuts were set to expire.
The threat that the country might not pay all its bills caused a slump in financial markets and led in August 2011 to the first downgrade of the nation’s credit rating. It left broader economic scars, too. Many economists contend it hurt economic growth and jobs.
A July report by the Government Accountability Office found that the delay in raising the debt limit increased the country’s borrowing costs by about $1.3 billion in the 2011 fiscal year. “However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011,” the report noted, adding that the debt-limit fight diverted Treasury’s time and resources from other priorities.
This year, Congress will have time to negotiate a broader debt deal before needing to raise the ceiling, even if negotiations spill into January. But the ceiling will be a card in the complex political game that the White House, Senate Democrats and Congressional Republicans are playing.
Much as Democrats see President Obama’s veto threat over an extension of the Bush-era tax cuts for the highest earners as leverage over Republicans, some Republicans see the need to raise the debt ceiling as leverage over the White House, Republican aides said.
Even if the stakes do not get that high, both parties view lifting the debt ceiling as part of the fiscal-cliff negotiations, and they do not expect Congress to raise it outside of a broader deal.
“Resolving the issues surrounding the fiscal cliff, especially the replacement of the sequester, and the next debt limit increase (likely necessary in February) will require that the president get serious about real entitlement reform,” Representative Eric Cantor of Virginia, the House majority leader, said in a letter to conservatives this week, as printed on The Hill Web site.
That has Democrats warning Republicans not to risk the country’s credit rating and broader financial stability again.
“They tried it before: ‘We’re going to shut down the government. We’re not going to raise the debt limit,’ ” Senator Harry Reid of Nevada, the majority leader, told reporters this week. “They want to go through that again? Fine, but we’re not going to be held subject to something that was done as a matter of fact in all previous administrations.”
Economists have warned that the political posturing over the debt ceiling has enormously dangerous economic consequences — even more so than last year, given the threat of huge tax increases and spending cuts hitting households at the same time.
On Wall Street, analysts have tended to use terms like “apocalypse” and “global catastrophe” to describe what might happen should Congress not lift the ceiling.
This week, Fitch, the credit rating agency, threatened a downgrade to the nation’s credit rating if Congress cannot find a timely resolution.
“Failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch,” analysts at the agency said in a statement on Wednesday.
HSBC analysts this week warned clients of “echoes of 2011” in the uncertainty and market volatility the ceiling might cause.
And economists at the International Monetary Fund cautioned that the unstable situation in the United States might have international ripple effects.
“For now, a lack of political agreement keeps uncertainty about the fiscal road map unresolved,” the fund said in a global risk assessment. “Although bond yields remain low, when contentious political decisions — such as raising the debt ceiling — have come due in the past, uncertainty about the outcome led to unfavorable market reactions.”
But other analysts said they would be surprised if the debate over the ceiling became the debacle it did last year. Many Congressional aides said neither side had any interest in causing market panic for political gain.
“Markets are now starting to become the disciplinarians,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “C.E.O.’s are finally stepping up to the plate and saying, ‘Excuse me, we can’t do this.’ And that puts political donations and jobs on the line.”
Debt Ceiling Complicates a Tax Shift
This article
Debt Ceiling Complicates a Tax Shift
can be opened in url
http://newsbelle.blogspot.com/2012/11/debt-ceiling-complicates-tax-shift.html
Debt Ceiling Complicates a Tax Shift
