With the fight over fiscal cliff issues only just resolved, the battle lines already are being drawn and important policy and economic implications measured for a coming showdown on the federal debt ceiling.
The federal government is expected to run out of borrowing authority by the end of next month, and both parties are readying a high-stakes game of chicken, with Republicans hoping to leverage new spending cuts in return for a debt limit increase and Democrats promising to hold firm in opposition.
Less than 30 minutes after the House cleared fiscal cliff legislation (HR 8), President Barack Obama reiterated his vow not to bargain for an increase in the debt limit as he did in 2011. And he warned that a government default would dwarf the threat of the just-averted tax and spending cliff.
“While I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed,” Obama said late Tuesday night. “If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff.”
The federal government formally reached its debt limit on Dec. 31, but the Treasury Department is taking what it calls “extraordinary measures” to prevent a default. Treasury Secretary Timothy F. Geithner told lawmakers he can create approximately $200 billion of headroom under the government’s $16.4 trillion debt limit, which normally would last about two months.
The political pivoting toward a new confrontation started before the fiscal cliff vote this week, and it picked up immediately after the vote with calls across the GOP for a new focus on cutting spending.
Stung by the view across much of his party that Republicans lost to the president in the cliff negotiations, Speaker John A. Boehner of Ohio has said that everything, including raising the debt ceiling, comes with a price. “The speaker’s position is clear: Any increase in the debt limit must be matched by spending cuts or reforms that exceed the increase. The president knows that,” Boehner aide Michael Steel said Wednesday.
The office of Senate Minority Leader Mitch McConnell, R-Ky., issued a statement Wednesday saying that the debt ceiling is an “opportunity to curb out-of-control Washington spending.” McConnell also called on Senate Democrats to write bipartisan legislation by early next month that would “achieve meaningful spending and government reform,” saying the Senate should act in regular order rather than “hoping someone else will step in once again to craft a last-minute solution.”
The New Year’s cliff deal postponed the across-the-board spending cuts mandated by last year’s debt ceiling for two months, until March 1, right around when Treasury will brush up against the debt ceiling. The latest continuing resolution to fund the government also expires on March 27. Republicans hope to seize on all these deadlines to win spending reductions or changes to entitlement programs, but the debt ceiling is surely the most powerful of hammers.
“Now the fight moves to spending cuts,” anti-tax activist Grover Norquist tweeted a few hours before the House voted on legislation to extend the 2001 and 2003 tax cuts (PL 107-16, PL 108-27) for individuals reporting less than $400,000 in income and families earning up to $450,000.
“Our opportunity here is on the debt ceiling,” Sen. Patrick J. Toomey, R-Pa., said on MSNBC on Wednesday. “The president’s made it very clear. He doesn’t want to have a discussion about it because he knows this is where we have leverage.”
There’s no clear consensus on what a government default on its debt obligations would look like.
Toomey and other tea-party-backed lawmakers argued last year that Treasury could prioritize payments to bondholders so the government would not actually default on its debt. Geithner ruled out such a possibility, saying it would still mean a government default on its obligations, but Toomey appeared to return to that argument again Wednesday, dismissing concerns about causing chaos in financial markets.
“A temporary disruption because we have to furlough the workers at the Department of Education or close down some national parks or not cut the grass on the Mall — that’s not optimal, it’s disruptive, but it’s a hell of a lot better than the path that we’re on,” he said.
Steve Bell, senior director of economic policy at the Bipartisan Policy Center and a former top congressional budget aide, is skeptical that the federal government could pick and choose its expenditures and worries that breaching the debt limit would inflict economic damage.
“The impact of failing to pay our debt on time and in full, and I mean all of our debts, it’s unimaginable,” he said. “It is inconceivable to me that the United States government would ever do that.”
Obama and congressional Republicans are likely to seek a debt ceiling increase in legislation that replaces the budget sequester set to take effect March 1, but it is unclear who would blink first if the deadline approaches without an agreement.
Many Republicans think Obama would ultimately fold, recalling how they secured more than $2 trillion in spending reductions over 10 years as part of the 2011 debt ceiling law (PL 112-25). The White House has already ruled out claiming that the Constitution’s 14th Amendment allows the president to raise the debt ceiling unilaterally, a position that may constrain Obama’s choices and resign the White House to something of a stare-down.
But in seeking to build support for the tax cut deal he helped devise, Vice President Joseph R. Biden Jr. assured nervous Democrats during the week that Obama would not again engage in such negotiations. Top Senate Democrats have argued that Republicans will not find much support from the public if they are seen as holding the global economy hostage to secure cuts to health programs for the elderly.
And if financial markets start to teeter on worries about the U.S. fiscal situation, GOP lawmakers might quickly change their tune.
At least for now, members of the financial industry do not seem too worried about the prospect of breaching the debt limit.
“Congress will need to raise the debt ceiling towards the end of February,” said Scott Talbott, senior vice president of public policy for the Financial Services Roundtable. “Failure to raise the debt ceiling would prevent the U.S. from borrowing new money to cover its expenses. This casts a pall over the U.S.’s credit rating.”