FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 18, 2023

IN THIS ISSUE:

1. US Will Run Out Of Money July/September

2. Previous Standoffs Over The Debt Limit

3. Efforts To Resolve The Debt Limit Issue

4. So What’s Likely To Happen In 2023?

Overview: US Will Run Out Of Money July/September

The United States Treasury will exhaust its emergency measures to prevent a debt default sometime between July and September unless Congress raises the $31.4 trillion debt limit, the Congressional Budget Office projected Wednesday.

The latest projection notes that the final date will be determined by tax revenues the IRS receives in April. Should those revenues decline significantly from CBO’s estimates, “the extraordinary measures could be exhausted sooner, and Treasury could run out of funds before July,” CBO director Phillip Swagel said in a statement last week.

The CBO also revised its projection for the size of the annual federal budget deficit over the next decade. The agency now believes the deficit will total $18.8 trillion over the next 10 years, a figure that is 20% higher than the agency’s estimate last May of $15.7 trillion.

The US reached the current debt limit in January of this year, at which point Treasury Secretary Janet Yellen initiated a series of established steps, known as the “extraordinary measures,” that allow the government to continue borrowing money to meet its obligations.

Should those measures be exhausted before President Joe Biden can sign off on a new debt limit passed by Congress, “the government would have to delay making payments for some activities, default on some of its debt obligations, or both,” said Swagel.

The CBO will release another estimate in May that takes into account the 2022 tax revenue, Swagel said at a press conference later last week.

Top Republicans and Democrats on Capitol Hill have repeatedly assured the public that the United States will not default on its debt, and that an agreement will be reached and a bill passed in time to avert a crisis.

But what that legislation will look like, and precisely how it will win majorities in both the narrowly Republican-controlled House and the narrowly Democratic-controlled Senate, is anybody’s guess.

A large bloc of Republicans in the House are demanding Congress pass drastic cuts to federal spending before they will agree to vote to raise the debt limit, effectively using their leverage within the GOP to force their priorities to the front of the line.

Republicans argue the debt limit and annual federal spending are inextricably linked, the same way household debt is a product of household spending.

But Democrats counter that the majority of money spent by the government is used to fund a mandatory expense like Social Security payments or interest on the national debt, and that federal spending cannot be cut like a household budget.

The CBO estimates released earlier this month are likely to feature prominently in the coming debate over federal spending.

The CBO attributed the significant jump in the federal deficit in the next decade to several factors, including the cost of legislation passed by Congress last year, rising costs of Medicare, Social Security, veteran benefits and future interest payments on a higher national debt.

Meanwhile, the agency projected that tax revenue will not keep pace with these rising costs. And certain tax revenues are expected to fall, like those from gas taxes as more Americans drive electric vehicles.

Previous Standoffs Over The Debt Limit

While there are clues to how this showdown will play out politically from other recent debt standoffs, there’s also reason to believe this time could be different. Why is that? A larger portion of GOP lawmakers seem willing to allow the country to default and Biden seems unlikely to enact the kinds of spending cuts that would satisfy them.

Recent major conflagrations over the debt and spending, in 1995 and 2011, occurred under Democratic presidents who lost control of the House to Republicans.

It just so happens that we are in exactly that situation right now, albeit with a narrow GOP majority instead of the strong ones enjoyed by then-House Speakers Newt Gingrich (in 1995 and 1996) and John Boehner (in 2011 and 2012).

Those past examples offer a guide to what probably lies ahead as House Speaker Kevin McCarthy tries to force spending cuts out of Biden.

It was a relatively novel concept to use the debt ceiling as leverage when Republicans took control of the House in 1995. Back then, the debt was less than $5 trillion and a little less than 65% of the GDP.

The debt ceiling was at first wrapped up in a spending bill. There was ultimately a government shutdown but no default on the national debt during a yearlong saga in which Republicans ultimately blinked on using the debt as a weapon.

Then-President Bill Clinton at one point accused Gingrich of blackmail over spending and vetoed debt ceiling increases. They ultimately agreed to raise the debt ceiling after a separate spending bill was enacted. They also shook hands on balancing the federal budget with help from cuts and a roaring US economy before the tech bubble burst.

Tax cuts and the post-9/11 wars enacted by Clinton’s successor, George W. Bush, ended the brief era of the balanced budget. The fact that the balanced budget barely affected the national debt at the time is the subject for another story.

Efforts To Resolve The Debt Limit Issue

During subsequent debt standoffs in the Obama years, Clinton suggested the president should invoke new power in the 14th Amendment and simply cut Congress out of the debt ceiling equation.

John Boehner, then Speaker of the House, and then-President Barack Obama dueled over  spending and the debt ceiling for years starting in 2011, when the debt was about $16 trillion, or around half of what it is today.

Boehner and Obama agreed to across-the-board spending cuts – the Budget Control Act of 2011 – as an incentive to reach a larger agreement to control deficit spending but failed to reach that larger agreement before Boehner was nudged out of the speakership and Obama left office. It was an unpopular solution, and it took lawmakers years to finally end the system of spending caps.

Meantime, the country came so close to a default in 2011 that Standard & Poor’s downgraded the US credit rating, where it continues to be AA+ rather than the top-level AAA. That signaled to the world that the US, long considered the safest place in the world to invest money, may not make good on its debt obligations (other major rating agencies warned about the debt ceiling crisis but never lowered the US credit rating). S&P’s action temporarily sent the stock market plunging.

Then-Senate Majority Leader Mitch McConnell got creative, suggesting the president be able to raise the debt unless both houses of Congress vote to override his decision. That method was utilized in 2013.

In 2013, lawmakers voted for the first time to suspend the debt ceiling rather than raise it.

These suspensions of the debt ceiling recurred every few years alongside separate spending fights that caused a series of partial government shutdowns during the Obama and Donald Trump years. When Biden took office in 2021, Republicans returned to insisting on raising the debt ceiling rather than suspending it.

Democrats have shown no interest in using the debt ceiling to enact changes, even with Republican presidents.

During the Ronald Reagan and George H.W. Bush years, they utilized the Gephardt Rule, named for former Rep. Richard Gephardt, to automatically tie the debt ceiling to spending bills.

In the more recent years when they’ve controlled the House (2007-2010 and 2019-2022), despite tax cuts and expensive wars that also drove deficit spending, Democrats worked to raise the debt ceiling when needed under then-Presidents George W. Bush and Trump.

And Republicans, when there’s a GOP president like Trump, have not made as much of an issue over the debt – although now Trump is encouraging fellow Republicans to use the debt ceiling to exact spending cuts from Biden.

So What’s Likely To Happen In 2023?

If the 1995 and 2011 examples are a guide, there will ultimately be some kind of agreement for some kind of spending cuts. And this drama will continue for months as the Treasury Department exhausts extraordinary measures, which may last until June or July.

Annual government funding doesn’t expire until the end of September.

These two issues – the debt ceiling and government funding – have often been tackled together. In any event, 2023 is looking to be a year focused on debt and spending.

While everyone knows how this issue gets settled ultimately, I expect there will be another nasty fight later this year as the default threat looms closer. Lawmakers on both sides of the isle know how this ends up, but it will surprise me if there’s not another debt ceiling standoff that roils the markets this fall.

Politicians never learn. What else is new?

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Government Default In June A Significant Risk This Year

Here's When The Debt Ceiling Crisis Gets Increasingly Risky

The Treasury’s Debt Ceiling Shell Game (interesting)

Gary's Between the Lines column:
Inflation Eases In March, But Still Way Too High

 

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