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CBO: Debt limit to hit as soon as July, budget picture worsens

New laws boosting federal spending, higher interest rates, inflation mean larger deficits as parties wrangle

Congressional Budget Office Director Phillip L. Swagel says policymakers should start to deal with long-term fiscal imbalances.
Congressional Budget Office Director Phillip L. Swagel says policymakers should start to deal with long-term fiscal imbalances. (Caroline Brehman/CQ Roll Call file photo)

The federal government will run out of cash to pay all its bills sometime between July and September unless the statutory debt limit is lifted, the Congressional Budget Office warned Wednesday.

The report by the nonpartisan budget scorekeeper could put pressure on a divided Congress to reach a deal to increase, or at least suspend, the debt limit before adjourning for the annual August recess.

Treasury Secretary Janet L. Yellen last month began deploying “extraordinary measures,” such as suspending investments in certain federal trust funds, to keep from exceeding the $31.4 trillion statutory borrowing cap. Yellen estimated at the time that those accounting tools may not last beyond early June. The agency’s current crop of extraordinary measures, triggered by what’s known as a “debt issuance suspension period,” are set to end June 5.

The new CBO projection suggests Congress might have a little more time to spare beyond June, but not necessarily. The projected exhaustion date for federal borrowing remains “uncertain,” the CBO said, because tax revenues and spending in coming months could differ from the agency’s assumptions.

If income tax receipts in April fall short of expectations, “the Treasury could run out of funds before July,” the CBO said in its report.

And if the debt limit is not raised or suspended before the Treasury’s “extraordinary measures” are exhausted, “the government would have to delay making payments for some activities, default on its debt obligations, or both,” the CBO said.

Congress last raised the debt ceiling in December 2021, by $2.5 trillion.

The budget office’s timing projection is more in line with private forecasters who’ve been skeptical that Treasury will run out of emergency cash — which stood at $501 billion as of Monday — and extraordinary measures by early June. 

The “base case” outlined by Wrightson ICAP, an investment research firm that monitors the Treasury market closely, is that borrowing room will run out by late July or early August.

The firm sees a “safe harbor” with estimated tax receipts arriving June 15 and a new infusion of extraordinary measures on June 30. But Wrightson ICAP said there remains “tail risk” that Congress would need to act by early June given “Treasury’s financial position will be at a low ebb from June 6 to June 14” after Treasury’s debt issuance suspension period ends.

Outlook darkens

House Republicans are insisting on spending cuts to accompany any debt limit increase with a goal of balancing the budget within a decade or so. There are few indications as to how the impasse will ultimately be resolved, though both sides say there’s no appetite for “default” and that short-term patches are on the table to buy time.

Democrats are rejecting demands for cuts, arguing that GOP pledges to protect Social Security and Medicare from cuts would leave the rest of the federal budget with such steep cuts that such a plan couldn’t even pass the House.

“The math doesn’t add up,” Senate Majority Leader Charles E. Schumer, D-N.Y., said in floor remarks Wednesday. “I worry that the dangers of slipping into default will only increase as the toxic dynamic in the House GOP gets worse day by day. That’s why it’s so important that now, early on, the House Republicans show us their plan.”

House Republicans are expected to lay out their budget blueprint in April, after President Joe Biden unveils his fiscal 2024 budget on March 9.

Biden says his budget will lower deficits by $2 trillion over a decade, mainly through higher taxes on the rich, and that thus far Republican proposals would only add to deficits, primarily by extending tax cuts set to expire after 2025. 

But a separate CBO report issued Wednesday underscores the challenges for both parties in making the math add up. Deficits over the next decade are now projected to grow by $3.1 trillion, or 20 percent, during the next decade from the agency’s forecast last May. 

Nearly half of that is the result of new laws, including a pricey new veterans toxic exposure benefit; the climate and health care budget reconciliation package; new semiconductor manufacturing subsidies; the fiscal 2023 omnibus appropriations law and more. The rest of the widening budget gap is the result of economic and technical changes, namely the effects of higher inflation and interest rates.

The fiscal 2023 deficit is now expected to come in at $1.41 trillion, or $426 billion higher than the CBO forecast last year. In fiscal 2032, the gap will rise to nearly $2.5 trillion, a $227 billion increase from the prior projection that would make any balancing job that much harder.

Debt as a share of gross domestic product is now projected to hit 115 percent by fiscal 2032, up from 110 percent in last May’s projection.

In a statement, CBO Director Phillip L. Swagel said the “projections suggest that changes in fiscal policy must be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt.”

Weaker growth

Economic growth is estimated to be weaker than CBO anticipated last year, falling to 0.1 percent when measured as the change from the fourth quarter of 2022 to the fourth quarter of 2023. That compares to already slowing growth in 2022, when the economy expanded by an inflation-adjusted 1 percent, down sharply from the previous year coming out of the pandemic-induced downturn.

But as the Federal Reserve gradually reduces its target federal funds rate after its recent hiking cycle, the agency said, real gross domestic product growth will rebound and be stronger than earlier expectations.

“For 2023, we project stagnant output, rising unemployment, gradually slowing inflation, and interest rates that remain at or above their levels at the beginning of the year—before the economy subsequently rebounds,” Swagel said.

Inflation is expected to decline this year and continue to fall until 2027. But the agency projects it will be higher over the next two years than estimated last May. Consumer price index growth is estimated to drop from 7.1 percent last year to 4 percent this year and 2.4 percent next year.

The CBO said recent data suggests inflation has been more persistent than it anticipated. And “supply-side disruptions have remained greater than the agency previously forecast,” the report says.

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