Posted September 21, 2011
Another showdown over default prior to next year’s election does not appear to be in the cards.
By Jay Powell, Loren Adler and Shai Akabas
If the president’s stimulus and deficit reduction proposals were to be adopted in their entirety as proposed, would we next need a debt ceiling increase before the 2012 election? Our analysis suggests that the answer is “no.”
As we have discussed previously, under current policy and economic assumptions, we project that the U.S. will not hit its debt ceiling until May of 2013.
The American Jobs Act proposes $447 billion in deficit spending, through a combination of stimulus spending and temporary tax cuts. According to the Office of Management and Budget, approximately $360 billion of the package is scheduled to occur by the end of 2012. All else equal, the effect of the Act would be to move the debt ceiling forward to December 2012.
The president also has proposed significant deficit reduction measures to offset the cost of this Act – in the form of tax increases on high-earners and cuts to healthcare and spending on other mandatory programs – but few of those measures begin before 2013, and so they have little impact on the timing of the debt ceiling.
Outside of additional deficit spending legislation (i.e., beyond the American Jobs Act), then, the only foreseeable factor that could move the debt ceiling nearer to the November 2012 election is a significant economic downturn. Such a turn of events would reduce revenue intake for next year and force the government to borrow even more than anticipated.
For example, the Congressional Budget Office’s (CBO) August Baseline projects real economic growth of 2.6 percent in the fiscal year ending September 30, 2012. Given recent economic data, there is ample reason to believe that the CBO’s estimates may be optimistic. If growth were 1 percentage point lower than currently projected, the CBO estimates that revenues would be $60 billion lower between now and the end of December 2012. Since fiscal year 2013 deficits are projected to run at an average rate of approximately $70 billion per month, each 1 percentage point reduction in real gross domestic product (GDP) growth would pull the debt ceiling forward by almost one month.
Whatever one believes about the wisdom of the American Jobs Act, there is a low probability of growth declining by two full percentage points in the face of an additional $360 billion in deficit spending during calendar year 2012. But, if that were to happen, we would hit the debt ceiling right around the time of the election.
Even if this were the case, as we saw over the summer, once we hit the debt ceiling, the Treasury Department has “extraordinary measures” at its disposal that enable the government to operate for some additional months before it actually runs short of cash. So even in this worst case scenario, there would be no need for a debt ceiling vote until early 2013.
The nation can breathe a sigh of relief, as another showdown over default prior to next year’s election does not appear to be in the cards.
Economic Policy Project