Debt Ceiling to Hit Mid-October

Posted: Aug 26, 2013 9:50 PM

Various short-term deals on the legal debt limit have seen creative and repeated extensions dating back to the big debt ceiling fight of 2011. Now, the Treasury Department has said they're out of options on the debt ceiling and it will be hit in the middle of October:

Lew said in a letter to Speaker John Boehner released Monday that the government is running out of accounting maneuvers it has used to avoid hitting the borrowing limit. He pressed Congress to act so Treasury can keep paying the government's bills.

Lew said it's impossible for Treasury to predict exactly when borrowing limit will be reached. But he warns that if action isn't taken soon, the government could be left with $50 billion in cash by mid-October. He says that wouldn't be enough to cover Social Security payments, military personnel salaries, Medicare and other programs for an "extended period."

That's about in line with what the Bipartisan Policy Center predicted after the last short-term debt ceiling deal:

Forecasting government cash flows is inherently uncertain, especially many months in advance. Unexpected changes in economic conditions or policy changes, such as from congressional action, could affect our estimate. One unknown is whether Freddie Mac will release its $30 billion deferred tax asset, which would result in a larger-than-usual dividend payment to the U.S. Treasury by September 30. By itself, however, a $30 billion increase in federal revenues would not be enough to change BPC’s projected X-Date window. We will continue to update our debt limit analysis as events warrant.

John Boehner has signaled a willingness to use the debt ceiling to negotiate for spending cuts - perhaps in the mould of a "grand bargain" with the White House. President obama, meanwhile, has repeatedly said "we are not negotiating on the debt ceiling."

In a sign that perhaps Republicans are not as serious about trying to extract concessions from Democrats on the debt ceiling, the big push to defund Obamacare is being tied to a budget resolution rather than the debt ceiling. In general, the debt ceiling is something not to take lightly - while it's not true that the government would default if we hit the debt ceiling, markets would react as if we did.

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