Treasury Secretary Jack Lew has issued another warning to Congress, specifically House Republicans, that it’s crucial that they raise the debt ceiling without conditions. His counsel echoed a request President Obama has been making during nearly two years of repeated budget battles.
In a Sept. 25 letter to House Speaker John Boehner, Lew estimated that extraordinary measures will be exhausted by Oct.17, 2013. By then, the Treasury would have only $30 billion to meet the country's obligations, well short of its expenses on certain days, which can range as high as $60 billion. Without sufficient cash on hand, it would be impossible for the United States to meet all of its obligations for the first time in history.
Government Shutdown vs. Debt Limit
How these closely related fiscal issues are defined—and how they’re different.
The closure of non-essential government offices due to a lack of approval on a government programs budget for the upcoming fiscal year. A continuing resolution must be passed by Sept. 30—the end of the fiscal year—to avoid a government shutdown.
When the federal government reaches its debt limit, it can no longer borrow to finance its obligations. If this occurs when the government is running a deficit, liabilities exceed incoming revenues. Without raising the current ceiling, the United States will exhaust emergency borrowing measures by Oct. 17.
Currently, the House of Representatives is working on passing a continuing resolution, which would fund the government through the next fiscal year. It may include a provision to kill the medical device tax and other key tenets of the Affordable Care Act. But any repeal of provisions set forth in the new health-care law would be met with staunch opposition in the Senate.
The deadline for funding the government is Sept. 30, the end of the current fiscal year. If that deadline is missed, then there would be a funding gap that would force a government shutdown. Historically, that has meant furloughs for hundreds of thousands of federal employees, mandatory work stoppages and a reduction of government activities. And these shutdowns have had a significant impact on numerous sectors of the economy. Since 1976, the U.S. government has shut down 17 times. The last shutdown lasted from Dec. 16, 1995, to Jan. 6, 1996, the longest in US history. But Congress pushed the country dangerously close to another shutdown in 2011.
Still, it’s important to note that any resolution on funding the government would only maintain the current fiscal budget, which includes the sequesters for discretionary defense and domestic spending that took place in March. However, the political price of passing that resolution could make raising the debt limit by mid-October more difficult, depending on the details of the agreement.
Lew said the idea of negotiating on the debt limit was a “different question” than continuing resolutions to keep agencies funded, taking exception to the idea that withholding the Treasury's borrowing authority could become an established negotiating tactic. The last debate over the debt ceiling, in 2011, marked a fundamental change in politics whereby lawmakers actually became comfortable with skirting the deadlines. The Treasury secretary has repeatedly pointed the finger at what he called a faction of 50 to 100 members in the House for the standoff, rather than blaming House Republicans as a whole. Indeed, there is only a small percentage of Republicans who believe that a government shutdown is an acceptable negotiating tool. “Future presidents, Democrat or Republican, cannot be in the position where they're compelled to accept unacceptable policy year after year because there's a faction that thinks default is an option,” Lew said.
Meanwhile, Lew has been holding discussions with congressional leaders, not to negotiate, but to make sure lawmakers understand the risk of hitting the debt limit. Effectively, not raising the debt limit would cause the United States to default on its loans. And after having its credit rating downgraded in 2011, the Obama administration doesn’t believe we can afford to take any more chances with our debt. Further complicating the issues is the fact that the Treasury refinances, with new debt, approximately $100 billion in US bills every Thursday. If US bond holders unexpectedly chose to be repaid rather than rolling over their investments, the Treasury’s cash balance could evaporate and the limited time that the Treasury could keep paying bills would be gone. And that would trigger a government shutdown.
While Republicans continue to worry about the nation’s rising debt and fiscal issues, they have played it close to the vest with how they will vote on a debt-limit package—and even closer on what that package might look like. However, experts argue that a government shutdown or credit downgrade would likely be worse politically for congressional Republicans than their Democratic counterparts. Yet, many moderate Republican members are facing potential primary challenges. They’re afraid that even a whiff of compromise with the president could be viewed as not adhering to fiscally conservative principles, and could leave them wide open to a defeat in 2014 mid-term elections.
What that means is the president has more leverage on the continuing resolution on funding because a government shutdown would likely put the blame on Republicans. However, the Republicans have more leverage on the debt ceiling because the president would take the fall if it blows up. That’s why Republicans may be willing to concede defeat on the funding bill and focus more intently on the debt ceiling.
In the days and weeks to come, the sabre rattling will generate a lot of juicy headlines. For example, President Obama said in a speech to the Business Roundtable—a group of Fortune 500 company CEOs—that there will be no negotiations with Congress on raising the debt ceiling. However, this was pure political posturing and merely the launching point for the debate.
Ultimately, the continuing resolution will get done, but it will intensify the debt-ceiling debate. The government will not shut down simply because it’s too big of a political risk—not to mention a blow to a fragile economic recovery. We’re likely to see yet another last-minute agreement that links the budget and debt limit together and kicks the can down the road until Dec. 15. Postponing these fiscal decisions buys legislators more time to work out the details and come up with a compromise. Don’t underestimate the use of the Christmas holiday to calcify the political will of Congress to get out of session.
Peter Lefkin is head of government and external affairs at Allianz of America.