It is this time again – the US Secretary of the Treasury is working with “extraordinary measures” in order to meet his obligations. At the same time, he is hopeful that Congress will raise the debt ceiling as soon as possible or continue to suspend it. Can we therefore anticipate a political tug-of-war on the “debt ceiling” issue for several months to come? According to estimates, creative budget management can only guarantee the solvency of the world’s largest economy up to the end of the fiscal year at most; in other words, for a period of six months only.
Another lasting dispute could be on the cards due to the entrenched domestic political fronts. Only at the start of this year, several federal authorities were forced to shut down for several weeks when no agreement could be reached on the budget for the current year. Furthermore, President Trump recently escalated the topic of “migration and wall-building” to new heights by threatening to declare a national emergency.
We do not expect fiscal policy to lead to a political escalation, unlike the scenario surrounding the building of the wall. Despite being divided on nearly all issues, the Democrats and Republicans both see the growing and meanwhile enormous level of state government debt as a serious problem. Although debt levels have meanwhile reached an imposing figure of around USD 22 trillion, a silent decision is expected in Congress in the weeks ahead, which will secure the US government’s solvency probably until after the presidential election in November 2020. However, this will not be altered by the fact that state government debt already exceeds annual GDP in the US by around 6%. This should be viewed at least in the context of the European criteria, the so-called Maastricht criteria.
There are several options for the fiscal policy procedure in the weeks ahead. On the one hand, the debt ceiling could continue to be suspended. In this case, we see a deadline until the next congressional and presidential election as the most likely solution, even though one could be found before that. In February 2018, Congress suspended the ceiling, which was actually aimed at limiting new borrowing, for a one-year period. Even then, reaching the debt ceiling was no longer a major political event. The Republicans have meanwhile lost the majority in the House of Representatives. However, the Democrats have never been known as advocates of fiscal discipline.
If contrary to our expectations, Congress does not extend the suspension, the debt ceiling will be raised, and probably to such an extent that solvency will also be guaranteed until the end of 2020. This route would, however, mean a tighter rein on parliamentary spending, as the increase would be estimated on the basis of the current expenditure and revenue plans.
On balance, it is likely to be confirmed once again in the coming weeks that the impact of the debt ceiling is close to zero. This is mainly because parliament more or less controls itself and voter support is seldom gained with warnings about high levels of state government debt. Ultimately, the fiscal outlook for the US is unlikely to change tack and government debt will continue to rise. The Congressional Budget Office (CBO), an independent congressional authority, assumes that the annual gap in the budget will increase rather than shrink in the years ahead. Hence, we are not expecting to see a decline in the debt ratio either.