The Secretary of the Treasury is telling Congress that the United States is likely to hit the debt ceiling established by the deal Congress reached last August before the end of 2012:
The U.S. economy appears to be gaining strength, but that won’t necessarily prevent another bitter showdown over raising the debt limit this year, according to Treasury Secretary Timothy Geithner.
“I think even with agreement and prospect on the payroll tax, we still do not expect that the debt limit until quite late in the year, significantly after the end of the fiscal year but before the end of the calendar year,”
“I think even with agreement and prospect on the payroll tax, we still do not expect [to hit] the debt limit until quite late in the year, significantly after the end of the fiscal year, but before the end of the calendar year,” Geithner said in testimony before the Senate Budget Committee on Thursday.
The fiscal year ends on Sept. 30. But whether the debt limit, which is now $16.4 trillion, is reached before the Nov. 6 election – setting up a particularly nasty fight along party lines – or after depends on just how well the economy does this year.
It’s off to a good start. The unemployment rate fell much faster than expected over the last two months and is now down to 8.3 percent. The Conference Board’s leading indicators, released on Friday, gave further evidence of a recovery on firmer footing.
But economists remind that the same thing happened last year, and the year before.
“The recent improvement in the incoming economic data… has raised hopes that the US economy could shrug off the crisis in the euro-zone and finally enjoy a more vigorous self-sustaining recovery,” analysts at Capital Economics wrote on Thursday. “But the U.S. economy has already been at this point twice before since the recession began, in early 2010 and then early 2011, only for growth to fall back sharply.”
Economic forecasters tick off now-familiar election-year headwinds: the European sovereign debt crisis, oil prices, the threat of another natural disaster disrupting global supply chains, and congressional gridlock.
The nightmare scenario, of course, is the one I mentioned last week; that Congress would be required to vote to raise the debt ceiling before the 2012 elections. Given how much of a political train wreck the battle was last July and August, one can only assume that it would be even worse immediately before an election where the Presidency, the House, and 1/3 of the Senate are at stake. The possibility of reaching an acceptable deal under those circumstances would be pretty slim. From Geithner’s testimony, though, it appears that the current estimate is that the limit would be reached late enough in the year that the Treasury Department would be able to avoid hitting the ceiling with the same accounting moves it made last year, thus pushing the drop-dead date until sometime after the election.
That’s slightly better, of course, but still not something to look forward to. In that case, we’ll have a scenario where either a lame duck Congress or the Congress that convenes in January 2013 will be required to act quickly on a matter that is incredibly politically unpopular. Between that and the issue of what to do about the Bush Tax Cuts, it’s likely to be a very messy December 2012 and January 2013.
