By Kate Davidson
WASHINGTON -- Treasury Department officials on Wednesday urged
Congress to move quickly to increase the federal borrowing limit
this summer, warning that the federal government could run out of
cash much sooner than in previous debt-limit episodes.
Congress voted in July 2019 to suspend the limit through July
31. If lawmakers can't reach another agreement before then, the
ceiling would automatically be reinstated and the Treasury wouldn't
be able to raise additional cash from the sale of government
securities.
In that case, the Treasury said it would take extraordinary
measures to keep paying the government's bills in full and on time,
as it has in the past. Those measures, such as redeeming certain
investments in federal pension programs and suspending new
investments in those programs to raise cash, have typically lasted
several months.
The government continues to face substantial uncertainty over
the pace of revenues and spending, making it difficult to predict
how long temporary measures might last this year, senior Treasury
officials said on a call with reporters.
"Treasury is evaluating a range of potential scenarios,
including some in which extraordinary measures could be exhausted
much more quickly than in prior debt-limit episodes," Brian Smith,
Treasury's deputy assistant secretary for federal finance, said
Wednesday.
After cash-conservation measures are exhausted, the Treasury
could begin to miss payments on its obligations to bondholders,
Social Security beneficiaries and veterans and default on the debt.
Such a full breach, which has never occurred, could have
significant effects on financial markets.
In 2011, when Republicans demanded policy changes in exchange
for a higher debt limit, stock prices fell amid the uncertainty,
and Standard & Poor's downgraded the U.S. debt rating.
The Treasury said this week it expects to have more cash on hand
at the end of July, when the limit may be reinstated, than it has
in previous debt-limit episodes. That would give the government
more time before it runs out of room to cover its obligations, said
Nancy Vanden Houten, a senior economist with Oxford Economics.
"Our current projections show a drop-dead date of late October
compared to our previous estimate of September, which assumed a
much lower cash balance at the end of July," Ms. Vanden Houten
said. "However, there is more uncertainty than usual about outlays
given the unpredictable timing of disbursements from Covid relief
packages."
Wednesday's warning could put pressure on Congress to act sooner
than it has in the past to lift the borrowing limit. Lawmakers are
scheduled to leave for their summer recess at the end of July and
not scheduled to return to Washington until September.
Congress faces another important deadline around the same time.
Government funding will expire after Sept. 30, the end of the
fiscal year, raising the prospect of a government shutdown if
lawmakers fail to authorize new spending for the next fiscal
year.
The Trump administration and Democrats reached an agreement to
raise the debt ceiling in July 2019 as part of a two-year deal to
raise federal spending caps, over the objections of most
Republicans. This time, Democrats control the White House and
Congress but have slim majorities in both chambers.
Democrats had considered but ultimately chose not to include a
debt-ceiling increase in President Biden's $1.9 trillion
coronavirus relief package, which was passed in March.
The decision means they will either have to include a debt-limit
increase in a second tax-and-spending package that is likely to
pass along party lines or negotiate with Republicans to have it
added to another bill.
Congress created the debt ceiling in 1917 to remove itself from
day-to-day financial management, giving the Treasury authority to
borrow up to a set amount rather than passing legislation for each
debt issuance. The limit has been raised or modified 98 times,
according to the Congressional Research Service.
Sometimes, debt-limit increases were tacked on to must-pass
legislation. Other times they weren't, as lawmakers used the limit
as leverage for other policy aims.
In 2011, Republicans propelled by the Tea Party movement took
control of the House and refused to raise the limit without
spending cuts. Days before the limit was reached, then-President
Barack Obama and Congress reached a deal to cut federal spending.
U.S. stocks fell during and after the showdown. Congress nearly
breached the limit in 2013 during a debate over the Affordable Care
Act.
The Treasury's ability to keep financing government operations
will also depend on the pace of federal tax collection and
spending, which have been volatile during the pandemic. Rapid
economic growth forecast for this year could boost federal revenues
more than expected, providing the Treasury with a bigger cash
cushion. An unforeseen shock -- such as a severe natural disaster
-- could boost spending and shrink the cash buffer.
The Treasury said earlier this week it plans to draw down its
cash balance ahead of the debt-limit deadline, but officials said
Wednesday that shift will be much less volatile than in previous
debt-limit episodes.
The government expects to reduce bill issuance by $150 billion
through the end of July, bringing the Treasury's cash balance to
about $450 billion.
The U.S. plans to borrow nearly $1.3 trillion over the next two
quarters as federal spending picks up following the Covid-19 relief
package enacted in March, assuming the debt ceiling is raised or
suspended. The borrowing would bring the total for the fiscal year
ending Sept. 30 to $2.3 trillion, compared with $4 trillion in the
last fiscal year, when the pandemic plunged the U.S. into a
recession that drove deficits to record highs.
Write to Kate Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
May 05, 2021 12:40 ET (16:40 GMT)
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