Schedule Update: Next Debt Fight Fall 2017, Not March 2017

By Jonathan Nicholson

Oct. 30 — With the Senate clearance Oct. 30 of the sequester replacement and debt limit deal, the Treasury Department's borrowing picture cleared up substantially. But while the package suspends the debt limit only until March 2017, it's likely Treasury won't have to worry about the ceiling again until almost 2018.

The reason? Treasury maintained in the bill (H.R. 1314) its ability to juggle various accounts to stay just below the limit once it is neared, authority likely to again prevent a default for several months past the expiration of the debt limit suspension set for March 15, 2017.

In short, the early betting for the next debt limit showdown would be around October 2017, give or take a few months. The exact timing would depend on how much borrowing Treasury has to do after the suspension expires, which in turn depends in part on how the economy performs. Adding to the cushion may be Treasury's redefinition of its desired cash-on-hand target.

Same Dates as Previous Debt Law

Nancy Vanden Houten, senior research analyst with Stone & McCarthy Research Associates in Princeton, N.J., said the amount of extra borrowing headroom provided by what Treasury calls its “extraordinary measures” depends on what time of time of year they are deployed.

The 2014 law (Pub. L. No. 113-83) that suspended the debt limit into March 2015 had the same calendar dates as the new bill, suspending the debt limit through March 15, and then resetting it at a new, higher level to include the debt accumulated during the suspension on the next day, March 16.

Treasury's ability this year to use extraordinary measures—which are now almost always deployed before a debt limit fix is enacted—gave it the ability to keep borrowing into April, which in turn provided a cash boost from annual tax receipts that, with the extra measures, delayed the actual exhaustion of borrowing authority until Nov. 3. Vanden Houten said the extraordinary measures gave Treasury about $320 billion in extra cushion to work with after the expiration of the debt limit suspension.

‘Normal Operating Balances' a Wildcard?

Treasury has also introduced a potential new wildcard into the equation that could net it some more time for the next debt limit go-around. Treasury said in May it intends to target $150 billion in cash on hand as its minimum cash balance. Treasury said the amount would be sufficient to cover about one week's worth of bills in the event the government was somehow prevented from accessing financial markets.

The sequester deal, like the previous debt limit suspension in 2014, says Treasury may only issue debt to pay for bills incurred during the suspension period and specifically prohibits the creation of a cash surplus “above normal operating balances in anticipation of the expiration of such period.” Treasury has in the past treated the language to mean its cash on hand when the suspension period expires should be about the same as when the period began.

But if Treasury defines “normal operating balances” as $150 billion, that could—in theory—give it some leeway to hold more cash ahead of the expiration. In turn, that could give Treasury even more borrowing headroom to use after March 15, 2017.

“My guess is that would be a point of contention,” Vanden Houten said.

Forecasts two years out are subject to a wide degree of uncertainty and much will depend on how the economy and federal finances perform. A better-performing economy, higher tax revenue and shrinking social safety net payments mean the need for a debt limit hike gets pushed further into the future. A more sluggish economy, and certainly a recession, would move the date closer in time.

Fiscal policy will make a difference, too, Vanden Houten said, but the new pact helps with forecasting that. “With the budget deal, we'll not have too many new surprises on the spending side,” she said.

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