D.C. summer heat set to inflame new debt fight

3 minute read

The U.S. Capitol stands in Washington, May 19, 2021. REUTERS/Joshua Roberts

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WASHINGTON, May 24 (Reuters Breakingviews) - America’s Memorial Day is traditionally the start of summer. This year’s Washington heat may conjure up memories of political fights over the federal debt ceiling, which is set to go back into effect on Aug. 1. That month also marks 10 years since Standard & Poor’s downgraded the U.S. credit rating.

Covid-19 relief efforts have helped take D.C.'s debt subject to the statutory cap to more than $28 trillion. Since 2019 lawmakers haven't separately considered the limit. Instead, increases have been baked into budgets. That logical approach is due to expire, and the $6 trillion increase in borrowing since the last explicit cap is sure to spark at least rhetorical outrage.

The brinkmanship 10 years ago now seems quaint. The Republican-controlled House of Representatives and then-President Barack Obama clashed over deficit reduction, and the government reached its borrowing limit of over $14 trillion in May 2011. The Treasury Department eked out its resources, but despite a last-minute deal to avoid a default, S&P that August took America's prestigious AAA credit rating down a notch to AA-plus.

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Part of the rating firm's rationale was that U.S. governance and policymaking had become less stable and effective. In some ways, the situation has worsened. Earlier this year, for example, Donald Trump became the first president to be impeached twice, the second time after riots at the Capitol. On the other hand, S&P may take the view that through all the rancor culminating in the pandemic and election year of 2020, U.S. institutions remained steady. The Federal Reserve survived attacks on its independence while a divided Congress managed to pass relief packages.

By that logic, this year’s debt-ceiling fight should merely produce more brinkmanship followed by a deal. Yet federal borrowing is reaching unprecedented levels. At the end of the 2020 fiscal year, total debt subject to the cap was 128% of GDP, compared to a previous peak of 118% in 1946 after World War Two. Interest payments will become more burdensome if and when rates rise, while the Congressional Budget Office estimates the debt figure could hit $34 trillion by 2026.

Add extreme partisanship, and it's harder now than 10 years ago to rule out a standoff that ends in a default. That's still very unlikely, but simmering tensions about government borrowing won't go away.

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- A suspension of the U.S. debt limit is scheduled to end on July 31. In addition to passing spending measures, Congress has traditionally set a statutory cap on federal borrowing. Since 2019, when the cap was about $22 trillion, it has been automatically increased in step with budget legislation. As of May 20, America's total public debt subject to the cap is $28.2 trillion.

- If lawmakers cannot agree increases in the debt ceiling to cover already legislated expenditure, the result can be a shutdown of government activity and the employment of so-called extraordinary measures by the U.S. Treasury to prevent the United States from defaulting on its obligations.

- Treasury Secretary Janet Yellen said on May 7 that extraordinary measures, if employed, may not last as long as they normally would because of the pandemic.

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