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U.S. Debt Ceiling Time Extended

Written By Brian Hicks

Posted April 29, 2013

According to a new report courtesy of the Bipartisan Policy Center, the U.S. might not actually hit its debt limit until October.

congress capitol hillThis extension is mostly due to recent improvements in economic growth overall combined with a higher tax revenue thus far in the year. What that means in terms of good news, of course, is that Congress now has more time to figure something out.

The bad news is that the present Congress is one of the most fraught ones in national history, consistently failing to come to an agreement over the simplest of issues, as we saw most drastically back during the fiscal cliff fiasco.

Let’s recall that the fiscal cliff was actually designed to be a deterrent to Congress—in other words, it was meant to say, “You need to figure something out in order to avoid some very unpleasant economic cutbacks all over the place.”

And let’s also recall that we sailed right over the cliff while Congress continued its infighting. The effects of the sequester—another such scenario—are yet to be fully realized, so we’re not past the storm yet.

As things stand, the U.S. is allowed to raise the debt ceiling next month. However, the report indicates expectations that the Treasury Department will instead make use of the extra time—after all, policymakers do need to get their act together soon in order to risk a first-ever government default.

Debt Ceiling

According to the L.A. Times, the Center suggests the date when the American government will hit its borrowing limit lies somewhere between early September and early October.

The Treasury has more money than it expected to have at this time. Because the sequestration mentioned above was widely foreseen, federal spending had already been on a decline. But the budget cuts happened anyway, and accompanying tax increases helped out.

Technically, of course, we actually hit the debt limit of $16.4 trillion late last year. But certain accounting acrobatics allowed an “extension,” during which Congress worked out a deal that suspended debt limit talks until May 18. Once May 18 is here, however, the limit will need to be raised.

And there Republicans have been demanding cuts in spending that must equal any increases in the debt limit, which is raising hackles on the Democratic side. Last time we had such a “debate” (in 2011), things got so bad that Standard & Poor’s cut the U.S. credit rating for the first time in history.

Just like last time, however, the Treasury is likely to execute more accounting maneuvers that would extend government borrowing ability through summer. This may include suspending the sales of state and local government series Treasury securities and otherwise freeing up funds to let the government continue paying its dues.

The increased limit will likely be around $250 billion higher—meaning the new limit will be between $16.6 and $16.7 trillion, The Hill reports. Bear in mind that in early September, payments for Social Security, Medicare, and veterans’ benefits all come due. This is likely to put significant pressure on the Treasury to somehow ensure the government can pay up.

Cause for Concern

Another cause for concern is the continuing instability of the economy both within the U.S. and abroad. Should the economy suddenly take a nosedive or get significantly worse than at present, the U.S. government will almost certainly need to raise the borrowing limit in order to make those big payments mentioned above.

If things continue as they are, we may not see any limit increases until October.

Businessweek comments on the hopeful state of the economy right now:

“A solid economy is certainly part of the story,” said Lou Crandall, chief economist at Wrightson Icap LLC in Jersey City, New Jersey. “Underlying fiscal trends are somewhat stronger than I had anticipated a few months ago.”

In general, individual income tax payments are up 14.7 percent and corporate profit taxes are up 18.6 percent, while the national fiscal year-to-date deficit is just $600 billion, based on $1.8 trillion in spending

Much of these increases are linked to the expiration of the payroll tax cut late last year, while smaller proportions are due to actual improvements in the economy. Precious metals are likely to continue proving themselves as attractive safe-haven bets until this uncertainty is resolved with clear guidance from the U.S. government.


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