For the fifth time in the last four years, the United States government is brushing up against its statutory borrowing limit. Just last Friday, the Treasury Department announced that it would begin deploying extraordinary measures, buying some additional time before the federal government would be at risk of defaulting on its financial obligations.
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This kick-the-can story, by now, is a familiar one. In 2011, after lengthy negotiations between Democrats and Republicans, Congress agreed to strike a deal that would increase the Treasury's legal capacity to borrow, but the histrionics damaged the U.S.' once-sterling credit rating. In 2013, a five-month debt limit standoff culminated with the partial government shutdown before lawmakers struck another temporary agreement. Now, with Congress still polarized and the government at its $18.1 trillion borrowing cap, a new round of negotiations has begun. Are the dynamics any different this time?
The answer is yes. Although the headlines may suggest impending doom, the reality is that policy makers have a lot more time — and a lot more opportunities — to reach a deal than in any of the most recent rounds of debt limit talks. In fact, according to the Bipartisan Policy Center's latest projections, the government will not actually run out of cash-on-hand until sometime in the fourth quarter of 2015. There are several reasons for this extended period.
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First, the deficit has been declining. As recently as Fiscal Year (FY) 2012, the federal government was running annual deficits exceeding $1 trillion. But thanks to rising revenues and relatively flat expenses, the Congressional Budget Office now projects that annual deficits in the fiscal years 2015 and 2016 will remain under $500 billion. Smaller deficits mean that the debt held by the public will increase at a slower rate than in the recent past, thereby consuming extraordinary measures at a slower pace so that the federal government can conserve cash.
Second, the timing of the debt-limit reinstatement is fortuitous. Due to the payment of tax refunds, February is typically the month with the highest net cash outflows. (Taxpayers who are owed refunds typically file earlier than those who expect to write a check to the U.S. Treasury.) Reinstating the debt limit in mid-March avoids depleting a big chunk of extraordinary measures on over $150 billion in tax refunds. The timing also allows Treasury to take full advantage of likely surpluses in April, as individuals pay balances due for 2014 and estimated taxes for the first quarter of 2015.
Finally, the extraordinary measures will create more headroom under the debt limit than they have in the past. That is because some measures involving the pension fund for federal employees are useful only at certain times of the year, such as June and September. As a result, Treasury will be able to maximize the use of these tools to the tune of about $350 billion and extend the period for which all bills can continue to be paid in full and on time. In 2014, these same extraordinary measures produced only about $200 billion of headroom under the debt limit.
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Because policymakers now have several additional months to address the debt limit, they also have more chances to do so, given the notably long list of "must-pass" pieces of legislation that could pave the way for an agreement. To begin, the latest patch to Medicare's physician-payment formula and authorization for the Highway Trust Fund expire at the end of March and the end of May, respectively. Sequestration is also threatening to return in full this fall, as the two- year, Ryan-Murray agreement on discretionary spending levels expires at the end of September. Funding for the Children's Health Insurance Program (CHIP) also expires at that time. All of these activities -- not to mention budget resolutions, appropriations, and other priorities outside of major fiscal policy -- are likely to consume substantial floor time and be hotly debated.
Of course, experience has shown that time and opportunity alone do not produce an agreement. After all, many Republican lawmakers still demand a more aggressive approach to cutting spending and reducing the deficit, while some Democrats contend that too much has been done already.
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But we believe this time is also different because both those on Capitol Hill and in the administration recognize that the risks of having Treasury operate with limited borrowing authority grow larger with each passing day. This critical understanding, combined with the slew of action-forcing events in the months ahead, suggest that the environment is conducive to finding a more meaningful path forward. Policymakers should not squander the opportunity to do so.
Commentary by Shai Akabas and Brian Collins. Akabas is associate director of the Bipartisan Policy Center's Economic Policy Project (EPP), which provides analysis of federal budget policy. debt limit developments, and retirement security issues. Collins is a senior policy analyst with EPP. Follow them on Twitter @ShaiAkabas and @BrianCPolicy.