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Again? Debt-Ceiling Fight Could Be Back Before 2012 Election Again? Debt-Ceiling Fight Could Be Back Before 2012 Election

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economy

Again? Debt-Ceiling Fight Could Be Back Before 2012 Election

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(istock.com)

Remember the debt ceiling? Thought that was all squared away over the summer by the Budget Control Act and the creation of the super committee? Maybe not.

There is a chance – and not a comfortably small one – that another debt-ceiling fight could rear its sure-to-be ugly head before the November 2012 election. The super committee could mitigate the risk by agreeing to $1.5 trillion in deficit reduction, but a lack of progress toward any deal at all means that’s unlikely.

 

Twin that with rising odds of a double-dip recession in the United States on the back of a eurozone crisis and weak U.S. housing and job markets, and it becomes clear the Treasury just might need more money, sooner.

“We don’t hit the debt ceiling until after the election, assuming the economy doesn’t crash and assuming that Europe doesn’t pull us back down,” said Ethan Pollack, a fiscal policy expert at the Economic Policy Institute. But if there’s a recession, Pollack said, “there’s a very good chance" the United States would hit its $15.2 trillion debt ceiling before the end of 2012.

That, he said, would be “really ugly. Really, really ugly.”

 

When Congress passed the Budget Control Act in August, it set up a two-step process to raise the debt ceiling by a minimum of $2.1 trillion, even if the super committee failed to reach agreement. Economists at that time projected $2.1 trillion would be enough for Treasury to meet all U.S. obligations, and avoid the threat of default, through 2012.

So far, the limit has been increased by $900 billion through an immediate boost of $400 billion followed by an additional $500 billion that was subject to a congressional disapproval process. The amount of the next increase depends on the super committee.

Under the law, President Obama can raise the debt ceiling by $1.2 trillion even if the super committee does not reach a deal. That holds no matter what happens to the automatic, across-the-board spending cuts – “sequestration” – that would be triggered by the special panel’s failure. It's true even if lawmakers tinker with automatic cuts through additional legislation.

But the Budget Control Act also allows for a more sizable boost to the debt limit – up to $1.5 trillion – if the super committee agrees on a deal that cuts anywhere from $1.2 trillion to $1.5 trillion from the deficit.

 

Let’s do the math: If the super committee agrees to $1.2 trillion in deficit savings, the debt limit would rise by $2.1 trillion since the Budget Control Act passed in August; if it agrees to $1.5 trillion in deficit savings, the limit would rise by $2.4 trillion. The $300 billion difference is significant – amounting to enough funds for the Treasury Department to pay America’s bills for roughly a month or two.

While economists in August expected the minimum debt-ceiling increase to be sufficient through 2012, analysts now caution that the situation has changed. The European sovereign debt crisis has escalated and its outcome is far from clear. In the United States, the San Francisco Federal Reserve this week put the odds of a double-dip recession in the first half of 2012 at 50-50.

Unlike the financial and economic crises of 2008, which brought Democrats and Republicans together momentarily, a debt-limit fight in a campaign year would be a “very, very messy thing,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan organization dedicated to fiscal responsibility. 

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