Return Of The Debt Limit And Sequestration: What Happens Next

Authored by Philip Marey of Rabobank

  • After being suspended for about a year, the debt limit returned on March 2. However, the Treasury Department will take extraordinary measures that could delay a federal government default to September or October.
  • Consequently, raising the debt limit could become tied to the budget negotiations for fiscal year 2020, which starts on October 1, 2019.
  • If no budget deal is reached before October 1 there are two possibilities: either Congress adopts a continuing resolution (triggering automatic spending cuts) or the government shuts down again.
  • Therefore, we may be heading toward a game of chicken between Republicans and Democrats with the threat of a government default and either sequestration or another government shutdown.

Introduction

While another government shutdown was averted in February, the debt limit returned in March. In early 2018, the Bipartisan Budget Act of 2018 suspended the debt limit through March 1, 2019. During this period, the Treasury Department was allowed to borrow what it needed to meet existing commitments. However, the amount of debt on March 2 will be the upper limit for the Treasury going forward. This does not mean that the government will go into default in March. The Treasury is able to take extraordinary measures that may delay a default to September or October. However, this means that the discussion about the debt limit could become tied to the negotiations about the budget for fiscal year 2020, which starts on October 1, 2019. The tricky aspect of the FY2020 budget negotiations is that if no budget agreement is reached before October 1, and Congress will have to pass a continuing resolution, automatic budget cuts will take place through sequestration. What’s more, if Congress also fails to pass continuing resolution, another government shutdown will take place in October. Therefore, we may be heading toward a game of chicken in Washington DC in September with the threat of a government default and either sequestration or another government shutdown.

Debt limit

In the US, the amount of money the Treasury Department is allowed to borrow is restricted by a debt limit. Prior to 1917 Congress was required to approve each issuance of debt. To smoothen the process, the Second Liberty Bond Act set a debt limit at $11.5 billion. Since then the debt ceiling has been increased about 100 times. Sometimes, the debt limit is temporarily suspended. In fact, in early 2018, the Bipartisan Budget Act of 2018 suspended the debt limit through March 1, 2019. Consequently, the amount of debt on March 2, about $22 trillion, will be the new debt limit.

However, this does not mean that the government will go into default in March. The Treasury is able to take extraordinary measures that may delay a default to September or October, depending on the outcome of the April tax season in particular. Tax revenues from corporations and individuals tend to peak around the April 15 filing deadline. While the CBO currently expects the Treasury to run out of cash ‘near the end of this fiscal year or early in the next one’, if tax revenues are higher than expected, this will move the deadline further into the next fiscal year. However, if tax revenues disappoint, the default could come earlier than expected.

Sequestration

The existence of a debt limit did not do much to slow down the accumulation of public debt. In fact, in terms of GDP, total public debt has risen from 30% in the 1980s to well over 100% in recent years. The Budget Control Act of 2011 made significant spending cuts over a ten year period and introduced spending limits, in addition to the debt limit. The Budget Control Act sets limits to the amount of discretionary federal spending in the fiscal years 2012-2021. If the appropriations bills passed by Congress exceed the spending caps for broadly defined categories for a certain fiscal year, the Treasury Department withholds the excess amount of funds from the government agencies that were supposed to benefit from the appropriated funds. The Treasury imposes automatic across-the-board spending cuts on the various categories. Sequestration aims to hit both defense and non-defense spending in a rather crude manner as it was originally intended to incentivize Republicans and Democrats to agree in early 2012 on a package of spending cuts for FY2012-2021. However, because negotiations failed, sequestration was triggered and now has to be dealt with every year.

The Bipartisan Budget Act of 2018 did not only suspend the debt limit; it also raised the spending caps imposed by the Budget Control Act of 2011 for FY2018 and FY2019. However, in FY2020 the spending cap is set to fall back again. If no agreement is reached on the budget for FY2020 before October 1, and Congress adopts a continuing resolution, automatic budget cuts will take place through sequestration. While sequestration is designed to hit defense and non-defense spending equally hard, the Republicans may be able to hedge the cuts in defense spending through the use of a Pentagon slush fund known as the ‘Overseas Contingencies Operations’ (OCO) fund. This would make the impact of sequestration asymmetric and give the Republicans leverage in the negotiations with the Democrats who would then be hit harder by the automatic spending cuts in case of no deal. If Congress even fails to adopt a continuing resolution, another government shutdown will take place in October.

Conclusion

The extraordinary measures available to the Treasury are expected to delay a government default to the turn of the fiscal year. This means that the debt limit may become entangled with the budget for the next fiscal year. Therefore a game of chicken between Democrats and Republicans may arise in September with the threat of a government default and either automatic spending cuts or a government shutdown.

Return Of The Debt Limit And Sequestration: What Happens Next <body> <h1> Array ( [0] => eeturn of the debt limit and sequestration: what happens next [1] => deturn of the debt limit and sequestration: what happens next [2] => feturn of the debt limit and sequestration: what happens next [3] => teturn of the debt limit and sequestration: what happens next [4] => 5eturn of the debt limit and sequestration: what happens next [5] => 4eturn of the debt limit and sequestration: what happens next [6] => rwturn of the debt limit and sequestration: what happens next [7] => rsturn of the debt limit and sequestration: what happens next [8] => rdturn of the debt limit and sequestration: what happens next [9] => rrturn of the debt limit and sequestration: what happens next [10] => r4turn of the debt limit and sequestration: what happens next [11] => r3turn of the debt limit and sequestration: what happens next [12] => rerurn of the debt limit and sequestration: what happens next [13] => refurn of the debt limit and sequestration: what happens next [14] => regurn of the debt limit and sequestration: what happens next [15] => reyurn of the debt limit and sequestration: what happens next [16] => re6urn of the debt limit and sequestration: what happens next [17] => re5urn of the debt limit and sequestration: what happens next [18] => retyrn of the debt limit and sequestration: what happens next [19] => rethrn of the debt limit and sequestration: what happens next [20] => retjrn of the debt limit and sequestration: what happens next [21] => retirn of the debt limit and sequestration: what happens next [22] => ret8rn of the debt limit and sequestration: what happens next [23] => ret7rn of the debt limit and sequestration: what happens next [24] => retuen of the debt limit and sequestration: what happens next [25] => retudn of the debt limit and sequestration: what happens next [26] => retufn of the debt limit and sequestration: what happens next [27] => retutn of the debt limit and sequestration: what happens next [28] => retu5n of the debt limit and sequestration: what happens next [29] => retu4n of the debt limit and sequestration: what happens next [30] => returb of the debt limit and sequestration: what happens next [31] => returm of the debt limit and sequestration: what happens next [32] => returj of the debt limit and sequestration: what happens next [33] => returh of the debt limit and sequestration: what happens next [34] => return if the debt limit and sequestration: what happens next [35] => return kf the debt limit and sequestration: what happens next [36] => return lf the debt limit and sequestration: what happens next [37] => return pf the debt limit and sequestration: what happens next [38] => return 0f the debt limit and sequestration: what happens next [39] => return 9f the debt limit and sequestration: what happens next [40] => return od the debt limit and sequestration: what happens next [41] => return oc the debt limit and sequestration: what happens next [42] => return ov the debt limit and sequestration: what happens next [43] => return og the debt limit and sequestration: what happens next [44] => return ot the debt limit and sequestration: what happens next [45] => return or the debt limit and sequestration: what happens next [46] => return of rhe debt limit and sequestration: what happens next [47] => return of fhe debt limit and sequestration: what happens next [48] => return of ghe debt limit and sequestration: what happens next [49] => return of yhe debt limit and sequestration: what happens next [50] => return of 6he debt limit and sequestration: what happens next [51] => return of 5he debt limit and sequestration: what happens next [52] => return of tge debt limit and sequestration: what happens next [53] => return of tbe debt limit and sequestration: what happens next [54] => return of tne debt limit and sequestration: what happens next [55] => return of tje debt limit and sequestration: what happens next [56] => return of tue debt limit and sequestration: what happens next [57] => return of tye debt limit and sequestration: what happens next [58] => return of thw debt limit and sequestration: what happens next [59] => return of ths debt limit and sequestration: what happens next [60] => return of thd debt limit and sequestration: what happens next [61] => return of thr debt limit and sequestration: what happens next [62] => return of th4 debt limit and sequestration: what happens next [63] => return of th3 debt limit and sequestration: what happens next [64] => return of the sebt limit and sequestration: what happens next [65] => return of the xebt limit and sequestration: what happens next [66] => return of the cebt limit and sequestration: what happens next [67] => return of the febt limit and sequestration: what happens next [68] => return of the rebt limit and sequestration: what happens next [69] => return of the eebt limit and sequestration: what happens next [70] => return of the dwbt limit and sequestration: what happens next [71] => return of the dsbt limit and sequestration: what happens next [72] => return of the ddbt limit and sequestration: what happens next [73] => return of the drbt limit and sequestration: what happens next [74] => return of the d4bt limit and sequestration: what happens next [75] => return of the d3bt limit and sequestration: what happens next [76] => return of the devt limit and sequestration: what happens next [77] => return of the dent limit and sequestration: what happens next [78] => return of the deht limit and sequestration: what happens next [79] => return of the degt limit and sequestration: what happens next [80] => return of the debr limit and sequestration: what happens next [81] => return of the debf limit and sequestration: what happens next [82] => return of the debg limit and sequestration: what happens next [83] => return of the deby limit and sequestration: what happens next [84] => return of the deb6 limit and sequestration: what happens next [85] => return of the deb5 limit and sequestration: what happens next [86] => return of the debt kimit and sequestration: what happens next [87] => return of the debt pimit and sequestration: what happens next [88] => return of the debt oimit and sequestration: what happens next [89] => return of the debt lumit and sequestration: what happens next [90] => return of the debt ljmit and sequestration: what happens next [91] => return of the debt lkmit and sequestration: what happens next [92] => return of the debt lomit and sequestration: what happens next [93] => return of the debt l9mit and sequestration: what happens next [94] => return of the debt l8mit and sequestration: what happens next [95] => return of the debt linit and sequestration: what happens next [96] => return of the debt likit and sequestration: what happens next [97] => return of the debt lijit and sequestration: what happens next [98] => return of the debt limut and sequestration: what happens next [99] => return of the debt limjt and sequestration: what happens next [100] => return of the debt limkt and sequestration: what happens next [101] => return of the debt limot and sequestration: what happens next [102] => return of the debt lim9t and sequestration: what happens next [103] => return of the debt lim8t and sequestration: what happens next [104] => return of the debt limir and sequestration: what happens next [105] => return of the debt limif and sequestration: what happens next [106] => return of the debt limig and sequestration: what happens next [107] => return of the debt limiy and sequestration: what happens next [108] => return of the debt limi6 and sequestration: what happens next [109] => return of the debt limi5 and sequestration: what happens next [110] => return of the debt limit znd sequestration: what happens next [111] => return of the debt limit snd sequestration: what happens next [112] => return of the debt limit wnd sequestration: what happens next [113] => return of the debt limit qnd sequestration: what happens next [114] => return of the debt limit abd sequestration: what happens next [115] => return of the debt limit amd sequestration: what happens next [116] => return of the debt limit ajd sequestration: what happens next [117] => return of the debt limit ahd sequestration: what happens next [118] => return of the debt limit ans sequestration: what happens next [119] => return of the debt limit anx sequestration: what happens next [120] => return of the debt limit anc sequestration: what happens next [121] => return of the debt limit anf sequestration: what happens next [122] => return of the debt limit anr sequestration: what happens next [123] => return of the debt limit ane sequestration: what happens next [124] => return of the debt limit and aequestration: what happens next [125] => return of the debt limit and zequestration: what happens next [126] => return of the debt limit and xequestration: what happens next [127] => return of the debt limit and dequestration: what happens next [128] => return of the debt limit and eequestration: what happens next [129] => return of the debt limit and wequestration: what happens next [130] => return of the debt limit and swquestration: what happens next [131] => return of the debt limit and ssquestration: what happens next [132] => return of the debt limit and sdquestration: what happens next [133] => return of the debt limit and srquestration: what happens next [134] => return of the debt limit and s4questration: what happens next [135] => return of the debt limit and s3questration: what happens next [136] => return of the debt limit and se1uestration: what happens next [137] => return of the debt limit and se2uestration: what happens next [138] => return of the debt limit and sewuestration: what happens next [139] => return of the debt limit and seauestration: what happens next [140] => return of the debt limit and seqyestration: what happens next [141] => return of the debt limit and seqhestration: what happens next [142] => return of the debt limit and seqjestration: what happens next [143] => return of the debt limit and seqiestration: what happens next [144] => return of the debt limit and seq8estration: what happens next [145] => return of the debt limit and seq7estration: what happens next [146] => return of the debt limit and sequwstration: what happens next [147] => return of the debt limit and sequsstration: what happens next [148] => return of the debt limit and sequdstration: what happens next [149] => return of the debt limit and sequrstration: what happens next [150] => return of the debt limit and sequ4stration: what happens next [151] => return of the debt limit and sequ3stration: what happens next [152] => return of the debt limit and sequeatration: what happens next [153] => return of the debt limit and sequeztration: what happens next [154] => return of the debt limit and sequextration: what happens next [155] => return of the debt limit and sequedtration: what happens next [156] => return of the debt limit and sequeetration: what happens next [157] => return of the debt limit and sequewtration: what happens next [158] => return of the debt limit and sequesrration: what happens next [159] => return of the debt limit and sequesfration: what happens next [160] => return of the debt limit and sequesgration: what happens next [161] => return of the debt limit and sequesyration: what happens next [162] => return of the debt limit and seques6ration: what happens next [163] => return of the debt limit and seques5ration: what happens next [164] => return of the debt limit and sequesteation: what happens next [165] => return of the debt limit and sequestdation: what happens next [166] => return of the debt limit and sequestfation: what happens next [167] => return of the debt limit and sequesttation: what happens next [168] => return of the debt limit and sequest5ation: what happens next [169] => return of the debt limit and sequest4ation: what happens next [170] => return of the debt limit and sequestrztion: what happens next [171] => return of the debt limit and sequestrstion: what happens next [172] => return of the debt limit and sequestrwtion: what happens next [173] => return of the debt limit and sequestrqtion: what happens next [174] => return of the debt limit and sequestrarion: what happens next [175] => return of the debt limit and sequestrafion: what happens next [176] => return of the debt limit and sequestragion: what happens next [177] => return of the debt limit and sequestrayion: what happens next [178] => return of the debt limit and sequestra6ion: what happens next [179] => return of the debt limit and sequestra5ion: what happens next [180] => return of the debt limit and sequestratuon: what happens next [181] => return of the debt limit and sequestratjon: what happens next [182] => return of the debt limit and sequestratkon: what happens next [183] => return of the debt limit and sequestratoon: what happens next [184] => return of the debt limit and sequestrat9on: what happens next [185] => return of the debt limit and sequestrat8on: what happens next [186] => return of the debt limit and sequestratiin: what happens next [187] => return of the debt limit and sequestratikn: what happens next [188] => return of the debt limit and sequestratiln: what happens next [189] => return of the debt limit and sequestratipn: what happens next [190] => return of the debt limit and sequestrati0n: what happens next [191] => return of the debt limit and sequestrati9n: what happens next [192] => return of the debt limit and sequestratiob: what happens next [193] => return of the debt limit and sequestratiom: what happens next [194] => return of the debt limit and sequestratioj: what happens next [195] => return of the debt limit and sequestratioh: what happens next [196] => return of the debt limit and sequestration: qhat happens next [197] => return of the debt limit and sequestration: ahat happens next [198] => return of the debt limit and sequestration: shat happens next [199] => return of the debt limit and sequestration: ehat happens next [200] => return of the debt limit and sequestration: 3hat happens next [201] => return of the debt limit and sequestration: 2hat happens next [202] => return of the debt limit and sequestration: wgat happens next [203] => return of the debt limit and sequestration: wbat happens next [204] => return of the debt limit and sequestration: wnat happens next [205] => return of the debt limit and sequestration: wjat happens next [206] => return of the debt limit and sequestration: wuat happens next [207] => return of the debt limit and sequestration: wyat happens next [208] => return of the debt limit and sequestration: whzt happens next [209] => return of the debt limit and sequestration: whst happens next [210] => return of the debt limit and sequestration: whwt happens next [211] => return of the debt limit and sequestration: whqt happens next [212] => return of the debt limit and sequestration: whar happens next [213] => return of the debt limit and sequestration: whaf happens next [214] => return of the debt limit and sequestration: whag happens next [215] => return of the debt limit and sequestration: whay happens next [216] => return of the debt limit and sequestration: wha6 happens next [217] => return of the debt limit and sequestration: wha5 happens next [218] => return of the debt limit and sequestration: what gappens next [219] => return of the debt limit and sequestration: what bappens next [220] => return of the debt limit and sequestration: what nappens next [221] => return of the debt limit and sequestration: what jappens next [222] => return of the debt limit and sequestration: what uappens next [223] => return of the debt limit and sequestration: what yappens next [224] => return of the debt limit and sequestration: what hzppens next [225] => return of the debt limit and sequestration: what hsppens next [226] => return of the debt limit and sequestration: what hwppens next [227] => return of the debt limit and sequestration: what hqppens next [228] => return of the debt limit and sequestration: what haopens next [229] => return of the debt limit and sequestration: what halpens next [230] => return of the debt limit and sequestration: what ha-pens next [231] => return of the debt limit and sequestration: what ha0pens next [232] => return of the debt limit and sequestration: what hapoens next [233] => return of the debt limit and sequestration: what haplens next [234] => return of the debt limit and sequestration: what hap-ens next [235] => return of the debt limit and sequestration: what hap0ens next [236] => return of the debt limit and sequestration: what happwns next [237] => return of the debt limit and sequestration: what happsns next [238] => return of the debt limit and sequestration: what happdns next [239] => return of the debt limit and sequestration: what happrns next [240] => return of the debt limit and sequestration: what happ4ns next [241] => return of the debt limit and sequestration: what happ3ns next [242] => return of the debt limit and sequestration: what happebs next [243] => return of the debt limit and sequestration: what happems next [244] => return of the debt limit and sequestration: what happejs next [245] => return of the debt limit and sequestration: what happehs next [246] => return of the debt limit and sequestration: what happena next [247] => return of the debt limit and sequestration: what happenz next [248] => return of the debt limit and sequestration: what happenx next [249] => return of the debt limit and sequestration: what happend next [250] => return of the debt limit and sequestration: what happene next [251] => return of the debt limit and sequestration: what happenw next [252] => return of the debt limit and sequestration: what happens bext [253] => return of the debt limit and sequestration: what happens mext [254] => return of the debt limit and sequestration: what happens jext [255] => return of the debt limit and sequestration: what happens hext [256] => return of the debt limit and sequestration: what happens nwxt [257] => return of the debt limit and sequestration: what happens nsxt [258] => return of the debt limit and sequestration: what happens ndxt [259] => return of the debt limit and sequestration: what happens nrxt [260] => return of the debt limit and sequestration: what happens n4xt [261] => return of the debt limit and sequestration: what happens n3xt [262] => return of the debt limit and sequestration: what happens nezt [263] => return of the debt limit and sequestration: what happens nect [264] => return of the debt limit and sequestration: what happens nedt [265] => return of the debt limit and sequestration: what happens nest [266] => return of the debt limit and sequestration: what happens nexr [267] => return of the debt limit and sequestration: what happens nexf [268] => return of the debt limit and sequestration: what happens nexg [269] => return of the debt limit and sequestration: what happens nexy [270] => return of the debt limit and sequestration: what happens nex6 [271] => return of the debt limit and sequestration: what happens nex5 ) </h1> </body>