The Treasury secretary has told Congress that his department will begin using “extraordinary measures” to stave off hitting the debt ceiling on Dec. 31, adding more pressure to the ongoing fiscal cliff talks between Congress and the White House.
Although Treasury has known for months that the debt ceiling could be reached in December, Timothy Geithner’s two-paragraph letter to Congress underscores how much the negotiations over Bush-era tax cut extensions and sequestration have stalled regular government activity.
The U.S. is approximately $95 billion away from reaching the legal borrowing limit of $16.4 trillion – a limit set by Congress in 2011. If the U.S. government were to exceed that limit, it would be unable to issue new debt to finance payments on existing debt.
To avoid such an outcome, Geithner informed Congress on Wednesday that Treasury “will shortly begin taking certain extraordinary measures authorized by law to temporarily postpone the date that the United States would otherwise default on its legal obligations.”
These measures would give the White House and lawmakers more time to reach a deal that would increase the government debt limit. The Treasury Department would do this by taking some measures to create $200 billion in headroom.
Among the extraordinary measures are suspending the sales of state and local government Treasury bonds, fiddling with federal employee pension funds, and postponing the purchase and sale of foreign currency.
With these measures, the Treasury is expecting to delay reaching the debt ceiling for an additional two months. But given the uncertainty of reaching an agreement on the fiscal cliff before the end of the year, Geithner said that it is impossible to predict the duration of the delay because of the difficulty in estimating what government expenditures and tax revenue will be in 2013.
“If left unresolved, the expiring tax provisions and automatic spending cuts, as well as the attendant delays in filing of tax returns, would have the effect of adding some additional time to the duration of the extraordinary measures,” he wrote.
Confirming Geithner’s uncertainty over the duration of the delay, the Bipartisan Policy Center, a think-tank in Washington, mentioned in a report last month that the government could run out of money as soon as February even after using the extraordinary measures. In addition, the think-tank noted that February is not a good month because it typically has very high government expenditures.
The U.S. government does not collect enough revenue to pay, so it has to borrow the difference. The government can do this in two ways: it can borrow money from investors by issuing Treasury bonds, and it can borrow from itself, mostly from Social Security revenue. On average, the U.S. government has to borrow $100 billion per month.
The last time the Obama administration notified Congress about approaching the debt ceiling, Republicans told the White House that unless the administration agreed to major spending cuts, Congress would not agree to raise the limit. The resulting debt standoff led to the Budget Control Act of 2011– a temporary fix that raised the debt limit last year in exchange for spending cuts. The stalemate also led one of the major credit rating agencies to downgrade the U.S. government’s credit rating for the first time in its history.
The Budget Control Act contained a provision to ensure that Congress would meet the obligatory deficit reduction targets by slashing spending by $1.2 trillion over 10 years starting January 1, 2013, which along with the expiring tax provisions will ultimately lead to the impending “fiscal cliff.”
Earlier this year, when a new round of sparring over the budget limit began, House Speaker John Boehner (R-Ohio) said he would not allow another increase in the country’s borrowing limit without an accompanying amount of spending cuts and reforms.
Seven months after Boehner’s remarks, the White House and Congress have yet to reach an agreement.
President Barack Obama tried to include the borrowing limit in the most recent budget talks, but Republican leaders demanded concessions in return. These negotiations ended in an impasse last week, after Boehner showed willingness to raise the debt ceiling for a year if Obama agreed to severe cuts in entitlement programs.
Obama and lawmakers returned to Washington shortly after Christmas to resume talks, with the House of Representatives announcing Thursday evening that it will return on Sunday in the hopes of springing back into action.
“The hope is the Senate will act responsibly and send us back their plan—either pass the bill we sent them or send us back what they pass,” said Rep. Blake Farenthold (R-Texas). “We’re coming back on Sunday to be ready to address what the Senate sends us.”
Boehner said on Wednesday that the Senate must act first on any new plan.
“The lines of communication remain open, and we will continue to work with our colleagues to avert the largest tax hike in American history, and to address the underlying problem, which is spending,” said the House leader in a statement.
Obama has said he would refuse to let Republicans leverage spending cuts in return for increasing the debit limit. But Republicans are aware that the threat of voting against raising the debt ceiling is an effective way of winning deficit reduction concessions.
Congressional leaders from both parties will meet Obama at the White House this afternoon in an 11th hour attempt to broker a deal, even if it is a scaled-back version of the package they sought to pass after the November election.