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U.S. Treasury Evaluating Various Scenarios for Debt Limit Reinstatement

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.
Source: Dow Jones

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