(CN) — The Treasury Department warned Wednesday that it may need Congress to once again extend the national debt limit, as the debt-to-GDP ratio hits highs not seen since the late 1940s.
“In light of the substantial Covid-related uncertainty about receipts and outlays in the coming months, it is very difficult to predict how long extraordinary measures might last,” the agency wrote on Wednesday in its quarterly refunding statement. “Treasury is evaluation a range of potential scenarios, including some in which extraordinary measures could be exhausted much more quickly than in prior debt limit episodes.”
If the debt ceiling, currently pegged at about $28 trillion, is breached, the Treasury cannot auction off any more bonds or notes and essentially lives “paycheck to paycheck” as tax revenue comes in. A debt ceiling default could lead to a downgrade in the nation’s credit rating — a disastrous scenario that could then shatter the world economy.
“We currently think the drop-dead date is around late October,” OxfordEconomics lead economist Oren Klachkin said in an interview. While the Treasury has a number of arrows in its quiver, “those could be exhausted more quickly than in past debt limit episodes given uncertainty surrounding cash flows,” he added.
Congress began setting a statutory debt ceiling about a century ago, but the legislative body has extended the ceiling more than 78 times since 1960, the Treasury Department has said.
In the last few years alone, the debt ceiling has been raised multiple times as financial crises and wars have caused the federal government’s tab to grow. The current debt ceiling expires on July 31, though some think the government may have wiggle room to borrow for another month or two past that date.
Last month, Republicans in Congress led by Florida Senator Rick Scott sought a return to austerity to curb the debt, trying to force spending cuts as a condition for raising the debt ceiling. Two weeks ago Scott said in an interview with NBC that, “I think Republicans agree that we have too much debt and that we have to figure out how to live within our means.”
Democrats last week reportedly began working on a solution to raising the debt ceiling, including possibly attaching an increase to a disaster relief bill currently in Congress, but they have not finalized what tactics they will employ.
The debt has exploded under both Democratic and Republican administrations. Both parties also have acted to temporarily raise the ceiling, though Republican presidents have done it nearly twice as often as Democratic ones.
Under President Obama, a Democratic-led Congress in 2011 upped the debt ceiling to nearly $14.3 trillion, and the debt ceiling was raised again two years later to about $17 trillion. President Trump added about $8 trillion to the debt during his four years in office, raising the ceiling to more than $20 trillion less than a year into office. In early 2019 Trump suspended the debt ceiling until after the 2020 election.
The Biden White House has added an additional $2 trillion in spending to the debt in a few months, with talk of other trillion-dollar projects on the way.
Some analysts now predict the debt ceiling will soon surpass 106% of the gross domestic product, a mark not seen since after World War II. “We continue to expect federal debt to rise as a share of GDP, ending the current fiscal year at around 105% of GDP and rising to around 110% by the end of FY2026,” Goldman Sachs analyst Alec Phillips wrote last month.
The Treasury has some options to create breathing space, but not to the same level that Congress can.
“The Treasury can create room under the debt limit and the ability to issue more debt by either delaying investments or ‘disinvesting’ investments of various trust funds,” Klachkin said.
The biggest pot would be the so-called G Fund, which is comprised of Treasury securities where government employees invest some of their retirement savings, he noted. “When Treasury is having debt limit problems, it simply stops reinvesting some or all of those funds and creates an equivalent amount of room to sell debt to the public and raise cash to pay bills,” Klachkin said.
Tapping into the G Fund can provide hundreds of billions of dollars, but the Treasury is required to make the G Fund whole the next business day once a debt limit impasse has ended. Further, the government is unable to tap into many larger trust funds, such as the ones for Social Security or Medicare, which may force Congress to act instead through budget reconciliation or some other measure.
“If we ever need a time when Congress needs to do their job and stop playing politics, it would seem to be in the next four or five months,” said J.B. Kurish, a finance professor at Emory University’s Goizueta Business School.
The reason, he says, is that a number of high-dollar government trust funds, such as the Social Security Disability trust fund and the Highway Trust Fund, will be coming due in the next decade.
“There are certain things Treasury can do to manage the limit, but fundamentally why do we have to go to the ‘break glass for emergency’ every time?” Kurish says. “It’s just slight of hand.”
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