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The Debt Ceiling and the Skinny Budget

Monday March 13th, 2017   •   Posted by Craig Eyermann at 6:34am PDT   •  

17546247 - political figure standing under a ceiling made of us money For the U.S. national debt, the date of March 16, 2017, marks the day when the statutory debt ceiling, which limits how much money the U.S. government can borrow, will go back into effect for the first time since it was suspended back on November 2, 2015, as part of former President Obama’s last budget deal with the U.S. Congress.

Last week, the U.S. Treasury Department announced that it will immediately begin employing “extraordinary measures” to ensure that the U.S. government’s total public debt outstanding stays below whatever level it will have reached at the end of the Ides of March. Reuters’ David Lawder reports on what that means:

U.S. Treasury Secretary Steven Mnuchin on Thursday called on Congress to raise the federal debt ceiling “at the first opportunity” and announced the first of several likely cash management measures aimed at staving off a U.S. default.

The Treasury said it would suspend sales of State and Local Government Series securities, known as “slugs,” effective noon EDT on March 15. A debt ceiling suspension expires at the end of that day….

Mnuchin said additional “extraordinary measures” to avoid default would likely be taken….

Analysts at the Bipartisan Policy Center, a Washington think tank, estimated last week that a U.S. payments default could be staved off until October or November with Treasury’s cash conservation efforts.

In the past, such extraordinary measures have meant doing things like delaying scheduled contributions to pension plans for civilian government employees and the military, and authorizing the U.S. Treasury to issue I.O.U.s to the pensions’ trust funds. These funds were then reimbursed immediately after the debt ceiling was increased to allow more new federal borrowing.

These extraordinary measures follow on the heels of other measures that the U.S. Treasury Department began using several months ago, as it began more actively managing the rate of growth of the U.S. national debt in advance of the reimposition of the debt ceiling on March 16, 2017. Barron’s Teresa Rivas reported before the holidays last December:

With 2017 just around the corner, Congress has its work cut out for it, as it must approve an increase to the US government’s debt ceiling. If it doesn’t, that could translate into volatility for Treasuries, according to Invesco’s Justin Mandeville.

In his latest note, Mandeville writes that if Congress doesn’t raise the debt ceiling, the Treasury’s cash balance—regulated by law—would have to decrease “dramatically,” which would in turn curtail Treasury bill issuance.

The Treasury has already started trying to address this possibility, drawing down its cash balance to meet the law’s mandate if necessary, and recent T bill auctions have been scaled back. With little incentive to change this in the first quarter, he says investors should expect low auction sizes that put pressure on rates.

If Congress doesn’t act, then the Treasury can use “extraordinary measures” to avoid default, but that would only give it breathing space until mid-year.

March 16, 2017, is also significant because the White House has announced that it will issue a preview of President Trump’s first official budget proposal, to be released in full in mid-April. Called the “skinny budget,” here’s how Michelle Cottle of The Atlantic described it:

Within the next couple of weeks, things are going to get vastly less breezy, when the White House officially drops its 2018 “skinny budget” on Congress. This will give lawmakers their first real peek at Trump’s economic priorities––beyond his usual unicorns-for-all pledge to slash taxes while spending willy-nilly on things like infrastructure and immigration enforcement.

At that point, stuff starts getting real.

To clarify, what the White House is handing over is not a full budget proposal. It is a “skinny budget,” which sounds like some god-awful low-calorie sludge you’d order at Starbucks, but is in fact a general overview of the president’s spending priorities for the 2018 fiscal year. As Trump budget director Mick Mulvaney stressed at a press briefing Monday, the outline will not address entitlement programs such as Social Security or Medicare; it will not tackle tax reform; it won’t get into any specifics on infrastructure; and it won’t attempt any sort of revenue projections. It will merely provide “topline” numbers on discretionary spending that the various agencies will be expected to abide by.

Americans can therefore expect a lot of phony political posturing and bureaucratic howling to begin in Washington, D.C., on Thursday, March 16, 2017.

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March 2017