The analysis raises the possibility that lawmakers might have to raise the nation’s borrowing limit before the election, a scenario they took pains to avoid in the debt deal passed in August.
Now, partially due to lower than expected tax receipts, the nation could reach the $16.4 trillion debt limit as early as late November, according to an analysis from the Bipartisan Policy Center (BPC) to be released Friday.
Just a few weeks ago, the Center has estimated the debt-limit wouldn’t be reached until the spring of 2013.
But continued sluggishness in the economy, coupled with the recent payroll package that adds to the deficit, is casting doubt on that timeframe, raising the possibility of a bitter fight over deficit spending at the height of a presidential election year.
Last year’s fight over the debt ceiling brought the nation to the brink of default and resulted in the first-ever downgrade of U.S. securities. The last-minute deal to raise the borrowing limit by $2.1 trillion was supposed to tide the government over until the end of 2012, by which point electoral politics would be in the rearview mirror.
But analysts at the BPC said it’s looking increasingly likely that those best-laid plans will be dashed by “unexpected circumstances.”
“Congress, the administration and outside analysts believed that this increase would allow federal borrowing under the limit until well into 2013,” writes Steve Bell, senior director of economic policy at BPC. “Due to unexpected circumstances … that belief appears increasingly likely to have been misguided.”
The timeline is shrinking, the BPC said, because corporations are paying significantly less in taxes than the Congressional Budget Office (CBO) has estimated in August, when the debt-limit increase was approved.
In its latest forecast, released in January, the CBO said that corporate tax receipts are “significantly weaker” than previously estimated, despite rising profits.
CBO lowered its forecast for corporate tax expectations by $78 billion in the January report.
The payroll tax package approved by Congress last week is also eating into the timeline. That legislation, which also extends unemployment insurance benefits and the Medicare “doc fix,” is estimated to increase borrowing by about $101 billion this fiscal year —about a month’s worth of borrowing under the debt limit, according to BPC.
The new analysis from BPC is in line with the latest projection from Treasury Secretary Timothy Geithner.
Geithner told lawmakers earlier this month that, even taking into account the payroll tax deal, the administration expects to hit the debt limit sometime before the end of the year, but “significantly after” the end of the fiscal year on Sept. 30.
He said a number of still unknown factors could significantly alter that timeline, such as the amount of tax receipts the government reaps in April.
Similarly, the Bipartisan Policy Center offered major caveats for its analysis, saying “substantial uncertainty” about the course of the economy for the remainder of the year could substantially alter when the debt limit is actually hit.
Instability in financial markets and economies in Europe, heightening tensions in the Middle East, potential spikes in gas prices or any major slowing of the U.S. economy could substantially alter the debt-limit projections, according to Bell.
Furthermore, hitting the debt limit in November would not necessarily require Congress to take immediate action.
When the government last reached the debt limit in May, Treasury was able to buy nearly three months of time using “extraordinary measures” that pushed the final deadline to August.
The BPC projects that similar measures by Treasury would give policymakers until February to strike a debt-limit deal.