It’s that time again, that ‘time’ being, of course, the next round of negotiations on the US debt ceiling that come round as regular as clockwork. The February 2018 suspension of the US debt ceiling expired in March earlier this year. This means that a dysfunctional Congress has been tasked to somehow hammer out a compromise that heads-off a potential technical default when current stopgap measures run out in the autumn. Adding to the complications is the fact that Congress is in its summer recess from the 4th August to the 6th September, plus lower than expected revenues have moved the so-called ‘drop-dead’ data from November to October and most recently to early September. Indeed those lower than expected revenues, added to the increase in public spending, saw the deficit nearly break USD1tn in the second quarter, before easing back to USD919bn in June.
As it stands, the talks between the Republicans and Democrats have been kicked into high gear. However, although closer than they were, a compromise remains elusive. Steven Mnuchin, the Treasury Secretary claimed last week that a deal was ‘very close’ that would raise the debt ceiling and set spending levels for the next two fiscal years. The White House has been trying to push the idea of separating these two issues so that the ceiling could be raised even if they fail to settle on spending plans. Speaker of the House of Representatives Nancy Pelosi has signalled that the two matters will not be separated.
The first debt ceiling fight began in 1953 when President Eisenhower faced a revolt by the Republican-controlled Senate. Eisenhower wanted more funding to build the national highway system, however, Congress had become alarmed at the build-up in the national debt during WWII. After much wrangling and some emergency measures taken by Treasury, the debt ceiling was raised in 1954. Once the ceiling is reached, the Treasury cannot issue any new debt, however, as we’ve seen in the past, that doesn’t mean that the US government can no longer fund itself. Through various sleights of hand and accounting tricks, the Treasury is able to continue making payments by so-called ‘extraordinary measure’. As those measures become exhausted, however, there is increased risk of a ‘technical default’. Finally, it’s also interesting to note that since 1959, the ceiling has been raised more than 80 times under administrations from both parties.