In the first year of the Trump administration, Capitol Hill has specialized in drama. From health care to taxes, decisions affecting large swaths of the economy have come down to the last minute. Months of wrangling over the repeal of the Affordable Care Act culminated in an ignominious defeat. Tax reform also came down to the wire in the Senate, narrowly squeaking through in a middle-of-the-night roll call. Next up, a debt limit drama could be on the way.
The debt limit’s suspension quietly ended on Dec. 8, the same day policymakers chose once again to punt on negotiating a budget agreement. In what has become ordinary practice over the past seven years, Treasury Secretary Steven Mnuchin announced the implementation of so-called extraordinary measures — accounting maneuvers that temporarily give Treasury extra borrowing room (and thus, cash) to pay the government’s bills while operating at the debt limit. BPC’s projection is that those measures would last until March, although tax reform, spending cap adjustments, and additional disaster relief could shorten the time frame.
The delay in extending the debt limit kicks off another round of associated costs to the federal government. Specifically, in anticipation of these political showdowns, investors have repeatedly demanded higher interest rates on Treasury securities that mature around the time of the “X Date,” the day extraordinary measures and cash reserves run out and the government can no longer meet its financial obligations in full and on time. The Federal Reserve and the Government Accountability Office both found that recent debt limit impasses came with a long-term price tag for taxpayers of at least several hundred million dollars.
These interest-rate spikes are alarming because they indicate investors believe there is a chance, however slight, of policymakers not acting in time to prevent a default on the federal government’s obligations. To date, that has never happened — policymakers have always extended the debt limit just in time to avoid a worst-case scenario. Predicting fallout from such an outcome is impossible, but economists from across the political spectrum have consistently said the economic consequences could be severe, if not catastrophic.
While policymakers have historically taken timely action, there are new reasons for concern. If this issue remains unresolved going into the new year, the upcoming “X Date” will be the first time the Trump administration and this Republican-controlled Congress have run up against the debt limit deadline with no easy out. Yes, the debt limit was extended in September, but the skids were greased by attaching it to emergency relief for Hurricane Harvey.
“Washington has always had a flair for the dramatic, but these days, little seems to be done without last-minute theatrics.”
Today, multiple unknowns exist when trying to project when and how the debt limit will be resolved.
Will Democrats accept a clean increase? Under President Barack Obama, Democrats regularly called for a debt limit increase without additional policy changes attached. Now, with several priority programs expiring and Democrats relegated to opposition-party status, it’s an open question how they will engage with the administration when their votes are needed for a debt limit extension.
As the majority party, will Republicans vote for a clean increase? Democrats are not the only ones who may come to the debt limit table with demands. While this would normally be a “heavy lies the crown” situation, a group of Republicans reportedly met to discuss a possible “wish list,” largely focused on using the debt limit to reinstall fiscal discipline in Congress (after possibly adding more than $1 trillion to the country’s $20 trillion debt burden with their tax bill).
Will the administration have a consistent approach? Prior to the debt limit suspension in September, Mnuchin and Office of Management and Budget Director Mick Mulvaney had sent mixed signals on how the administration would address the debt limit. Ultimately, that confusion was straightened out, but whether consistency will be a priority this time remains unclear. For example, the administration has demanded spending cuts to offset further disaster relief funding, which could be a sign of stances to come.
Until now, the risk of a debt limit crisis has been considered relatively low. Even past interest rate spikes caused by jittery investors only reflected a miniscule chance of default. But this mindset has largely been based on the behavior of the previous administration facing off with opposition-controlled Congresses. That script has now flipped, with unclear ramifications.
Washington has always had a flair for the dramatic, but these days, little seems to be done without last-minute theatrics. How policymakers respond to this new political dynamic will give us the first clear signal on how we should think about the debt limit in the Trump era.
Shai Akabas is BPC’s director of economic policy. His portfolio at BPC has included staffing the Domenici-Rivlin Debt Reduction Task Force, assisting Jerome H. Powell — the current nominee for chairman of the Federal Reserve — in his analysis of the federal debt limit in 2011-2012, and then leading that work after Powell’s departure.
Tim Shaw is a senior policy analyst for BPC’s Economic Policy Project. Prior to joining BPC, Shaw was a senior analyst at the Government Accountability Office, where he prepared reports for Congress on a variety of issues, including long-term fiscal policy, tax expenditures and the federal budget process.
The Bipartisan Policy Center is a Washington, D.C.-based think tank that actively promotes bipartisanship. BPC works to address the key challenges facing the nation through policy solutions that are the product of informed deliberations by former elected and appointed officials, business and labor leaders, and academics and advocates from both ends of the political spectrum. BPC is currently focused on health, energy, national security, the economy, financial regulatory reform, housing, immigration, infrastructure, and governance.