The debt limit is back. After a suspension of more than one year, the debt limit will be reinstated on Monday, March 16 at a level near $18.1 trillion. You may remember the long, debt-limit standoff in 2013, which began in May of that year and culminated in a partial government shutdown before the limit was suspended again in late October. It was reinstated briefly in February 2014, then suspended again until now.
Barring quick action by policymakers, the 2015 period of operation at the debt limit could last longer than any of those in recent years. Last week, the Bipartisan Policy Center projected that the Treasury Department would likely have enough extraordinary measures and cash-on-hand to meet all obligations in full and on time through some point in the fourth quarter of 2015 (i.e., sometime between October 1 and December 31), if the debt limit is not increased or suspended before then. Why so long?
First, 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.
Second, that same advantageous timing means that more extraordinary measures will be available. Some measures are useful only at certain times of the year, including June and September. Barring a major shock to the economy, extraordinary measures and cash-on-hand will last at least through September, which will enable Treasury to maximize the use of these tools.
Third, the deficit has been declining. As recently as Fiscal Year (FY) 2012, the federal government was running annual deficits exceeding $1 trillion. The Congressional Budget Office projects that annual deficits in FY 2015 and FY 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.
Because of these three factors, policymakers have several months to address the debt limit this year. But, Congress and the president have a notably long list of pressing items on the docket. 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.
Congressional leadership has made clear that default is not an option, but strong voices in the majority caucus continue to call for more aggressive spending cuts. With our projections showing that a one-year suspension (until mid-March of 2016) would effectively be a debt limit increase of approximately $700 billion and a two-year suspension (until mid-March of 2017 – i.e., into a new administration) would be roughly equivalent to a debt limit increase of $1.5 trillion, many conservatives may demand more demonstrated progress on deficit reduction. The debt limit adds an additional complication to this litany of fiscal issues on the horizon.