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Hitting the Debt Ceiling

Sunday May 19th, 2013   •   Posted by Craig Eyermann at 9:43am PDT   •  

On this Sunday, May 19, 2013, the U.S. federal government will metaphorically max out its credit card. Jeffrey Sparshott of the Wall Street Journal‘s Real Time Economics blog reports:

The U.S. government will bump up against the federal debt limit this weekend, though a series of emergency steps will allow it to continue paying all of the nation’s bills until at least early September, Treasury Secretary Jacob Lew said Friday.

“Nevertheless, Congress should act sooner rather than later to protect America’s good credit and avoid the potentially catastrophic consequences of failing to act until it is too late,” Mr. Lew said in a letter to House and Senate leaders.

Lawmakers in January agreed to suspend the debt ceiling until May 18, allowing the White House and Congress negotiate new spending and tax plans. But the sides haven’t made a deal, so on May 19 the debt limit will be restored to its previous level, plus the amount of borrowing that occurred while the limit was suspended.

That means that the Treasury will be up against the limit on Sunday.

Fortunately, the U.S. Treasury can use what it calls “extraordinary measures” to hold total public debt outstanding of the federal government to “just” $16.7 trillion, or about $138,560 per American household.

Those extraordinary measures involve things like a more careful management of the nation’s finances, which thanks to the recent surge of revenue for the federal government, could be sufficient to carry the nation through the end of the federal government’s current fiscal year at the end of September 2013.

That surge of revenue largely consists of three factors:

  1. Increased payroll tax collections, where all Americans who earn wages or salaries saw their taxes to pay Social Security increase by up to 2% of their paychecks on January 1, 2013.
  2. Increased revenue from Fannie Mae and Freddie Mac, both of which were taken over by the federal government in the aftermath of the first housing bubble collapse, who have benefited from the emergence and inflation of a new housing bubble in the U.S. in the second half of 2012.
  3. Increased tax collections for dividends and capital gains in 2012, much of which wasn’t paid until income taxes for that year became due on April 15, 2013. Here, following the re-election of President Obama, the fear having tax rates on dividends potentially triple as part of the pending “fiscal cliff” crisis at the end of 2012 drove many public companies to accelerate the timing of when they would pay out their dividends to help protect their shareholders from being exposed to the higher tax rates that would take effect after December 31, 2012. They did this by raiding a large portion of the funds they were setting aside to pay dividends in 2013, which they then paid out before the end of 2012 instead.

Only one of these three factors is likely to be sustained indefinitely, as there’s no telling how long the new housing bubble might last and the dramatic surge of capital gains and dividend tax collections seen at the end of 2012 is clearly the result of a one-time event. The chart below shows the impact of these changes in the Congressional Budget Office’s most recent projection for the next 10 years of the federal government’s budget deficits as a percentage of the nation’s GDP:


For now however, it means the federal government will run its lowest deficit in years, even though the national debt will still grow by hundreds of billions this year, as the U.S. is still far from a healthy fiscal situation in that its ability to withstand another major economic shock has not been restored.

Featured Image:
Calculated Risk

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May 2013