The Federal Budget Showdown: Will Congress Raise the Debt Ceiling?

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Penn's Marc Meredith, George Washington University's Neil Buchanan and Harry Stein of the Center for American Progress discuss the federal budget process.

Time is running short for Congress to hammer out a federal spending plan for fiscal year 2018, which begins October 1. Members of the U.S. House of Representatives adjourned for their August recess (and the Senate is poised to follow suit) following the defeat of the Republican effort to repeal the Obama-era Affordable Care Act. Legislators will return in September with a few scant weeks to work on avoiding a government shutdown. With several spending bills already passed, a major sticking point in the negotiations is whether Congress will raise the debt ceiling. University of Pennsylvania political science professor Marc Meredith, Neil Buchanan, a professor at The George Washington University Law School, and Harry Stein, director of Fiscal Policy at the Center for American Progress, joined the Knowledge@Wharton radio show on SiriusXM channel 111 to explain the federal budget process and the political maneuvering around it. (Listen to the full podcast using the player above.)

Here are their answers to five main questions on the topic:

What is the debt ceiling?

The United States typically spends more money each year than it makes in revenue from taxes and other sources, creating the deficit. The government borrows money to fill this deficit by issuing bonds. The debt ceiling is the upper limit of what the federal government is allowed to borrow.

Legislatively speaking, the debt ceiling is different from the federal budget and requires separate action by Congress to change.

“Essentially, the debt ceiling is like getting a credit card bill. You’ve made the decisions, those have consequences for the debt, and now you have to raise the debt ceiling in order to accommodate the laws that you’ve already passed,” Stein explained. “Generally, it’s not a thing that one party wins or loses. It’s just a basic function of keeping the wheels turning. Usually, it’s done without this much drama, although in recent years that’s changed.”

The process of setting the ceiling has become a bizarre spectacle, Stein said, and there’s talk on Capitol Hill about changing it. “I’d certainly like to see that, and I think you see growing support for that on both sides of the aisle.”

Meredith said he’s surprised that the debt ceiling wasn’t simply taken off the table this year, given the very crowded legislative agenda.

“The ‘out’ party always has this incentive to try to make life hard on the ‘in’ party,” he said. “In some ways, this is a tool that’s more useful for the Republicans than for the Democrats, if you think the Republicans more often want to cut budgets than the Democrats.”

Is it unusual for Congress to have no resolution so close to deadline?

Dancing right up to the deadline is not a novel move for Congress. The risky tactic resulted in a brief government shutdown in 2013.

Stein describes it as “high-stakes brinksmanship.”

“Essentially, the debt ceiling is like getting the credit card bill. You’ve made the decisions, those have consequences for the debt, and now you have to raise the debt ceiling….”–Harry Stein

“The really sad thing is basically no progress has been made over the course of the year. All this time has been wasted,” he said. “Congress has been moving spending bills that have no chance of becoming law because they’re not even trying to make these bills bipartisan. There’s been very little talk on what they’re actually going to do to raise the debt limit. The White House has sent out mixed signals, with the treasury secretary saying they need to do it and the budget director saying, ‘You should insist on some sort of concession.’ The majority of Congress has been similarly divided. We’re coming up to the brink, and there really isn’t a plan yet.”

If Congress doesn’t pass a budget by October 1, then a partial shutdown is sure to follow.

“We’ve been through that before. It’s painful, it’s annoying, it’s difficult, it’s a sign of dysfunction, but it’s not a catastrophe,” Buchanan said. By contrast, not raising the debt ceiling by the deadline puts the government in uncharted territory.

“The President is left in a situation where he has to execute the spending bills that Congress has already passed, which means paying bills that we’ve already incurred,” Buchanan said. “Simultaneously, Congress has said you’re not allowed to borrow more money. That’s a real crisis. That’s something we’ve never faced before.”

Just like Barack Obama did, Donald Trump is asking for the debt ceiling to be raised as a policy matter so he can execute the budget. Unlike Obama, Trump is making this request of a Congress controlled by his own party.

With Obama, “the Republicans acted like this was the second bite at the apple and getting more concessions,” Buchanan said. “Now, [budget director] Mick Mulvaney is saying, ‘Oh, this is an opportunity to get more concessions.’ But more concessions from whom? These are Republicans negotiating against Republicans. It’s not like the Democrats are standing in their way. It’s very strange.”

Stein agreed. “It’s almost as if they’re still stuck in this view pre-Trump where they saw themselves not having any responsibility for governing. That was wrong, too. It’s especially bizarre now. They seem, in the case of the debt limits, to not even recognize that they’re supposed to be governing.”

Is the U.S. really headed for a budget crisis?

A quick read of the headlines would have the world believing that the United States is on the verge of financial ruin if Congress and the White House don’t come to an agreement soon. But the situation isn’t as dire as it seems.

“The worst thing about the debt ceiling is it’s a manufactured crisis,” Stein said. “It’s a crisis with the debt that shouldn’t exist and wouldn’t exist if not for the posturing and political game-playing.”

The national debt is at a relatively high level as a share of the economy, but not alarmingly so, he said.

“No one wants to do the types of things politically that would be necessary to actually fix the deficit, so we end up doing these cosmetic-type fixes.”–Marc Meredith

“You look around the global economy and the U.S. economy, and there’s no reason to think that level of debt is problematic now,” Stein said. “In fact, we’re borrowing money at extremely low rates. The federal fiscal system is very strong, and the only reason that it wouldn’t be strong in the short term is if the Trump administration and Congress blow it up for no reason.”

Buchanan puts the blame on the contradictory actions of Senate Majority Leader Mitch McConnell. “In response to Obama’s suggestion that maybe we just not have a debt ceiling, McConnell says, ‘Oh, the President wants to allow the debt to go up literally without limit,'” he said. “At the same time, the way McConnell solved several of the right-up-to-the-abyss kind of moments was by suspending the debt ceiling.” It’s no wonder that voters are frustrated, he added.

Why isn’t anyone trying to fix the debt?

The simple answer to this complicated question comes down to political will, according to the experts.

“No one wants to do the types of things politically that would be necessary to actually fix the deficit, so we end up doing these cosmetic-type fixes,” Meredith said. “We have these deep structural issues with the deficit that right now aren’t causing many problems, that probably have the potential to cause more problems going forward. But the political will to deal with things like Medicare, Social Security, the things that are actually most relevant to the deficit, there’s just no political will to deal with that from either side right now.”

Both Stein and Buchanan agreed with Meredith. They have studied long-term deficit projections and said the single-biggest cost driver is soaring health care costs. The Affordable Care Act made strides in reining in those costs, but the future of that legislation is uncertain.

Tax reform, which is the next big item on the Republican agenda, could greatly impact the deficit, too.

“I think we’re going to hear a lot of posturing from this administration and this Congress about deficits,” Stein said. “But the real conversation is, how much are they going to increase deficits? How much are they going to weigh in tax cuts, which mostly benefit the wealthy and corporations? How much are we going to blow up deficits with those tax cuts?”

“Being fiscally responsible is not the same thing as the simple story politicians tell.”–Neil Buchanan

Buchanan also pointed out that there’s nothing wrong with running a deficit. “Standard macroeconomic theory doesn’t say that you should run a zero deficit. A couple of percent of GDP a year is fine as long as you’re spending it on something that’s actually worthwhile,” he said. “Why can’t we get the deficit under control? Under control doesn’t necessarily mean zero deficit, and it certainly doesn’t mean zero debt. Being fiscally responsible is not the same thing as the simple story politicians tell.”

Meredith said the push for tax reform will not be revenue neutral. He thinks the debt ceiling conversation will be taken off the table because of it. “I can see a world where some deal is reached and Congress says that this is not the time they want to deal with this,” he said. “What Trump has to hang his hat on is the economy. It’s not that his administration is putting in all this new legislation, it’s that the economy seems to be humming along at a pretty good clip.'”

Will Congress get it done?

Buchanan, Meredith and Stein believe that Congress will come to an agreement over the budget and avoid a government shutdown, but that resolution won’t be reached easily or painlessly. All three painted a pessimistic view of what is happening on Capitol Hill.

“The thing that makes me nervous isn’t the time crunch, but that we might have this kind of perfect storm that actually causes a breach,” Stein said.

For him, the perfect storm is the combination of high-stakes brinksmanship, the inherent difficulty of managing the federal budget and what he called the “incompetence” of the current administration. Put those aspects together, “and I think you have a really toxic scenario,” Stein said. “It doesn’t mean we’ll have a default. I don’t think that we will, but we’ve got the ingredients for one.”

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