WASHINGTON — After four years of trillion-dollar deficits, the red ink is receding rapidly in Washington, easing pressure on policymakers and shattering hopes for a summertime budget deal.
Federal tax revenues are up and spending is down thanks to an improving economy, tax hikes enacted in January and the hated budget cuts known as the sequester. As a result, the U.S. Treasury has slowed the pace of borrowing from the frantic days of the 2008 economic crisis and was actually able to repay a tiny fraction of the $16.8 trillion national debt in the first quarter of this year.
The slower borrowing rate means the Obama administration will be able to pay the nation’s bills for months without new borrowing authority from Congress — likely until Oct. 1, according to new independent forecasts. That might seem like good news, but it is unraveling Republican plans to use the debt limit deadline to force a budget deal before Congress takes its August break.
Instead, the fiscal fight now appears likely to bleed into the fall, when policymakers will face another multi-pronged crisis that pairs the risk of default with the prospect of a full-scale government shutdown.
In the meantime, Republicans face a listless summer, with no leverage to shape a new debt-reduction agreement.
After successfully goading the Democrat-controlled Senate into adopting its own budget plan, the House is ducking efforts by Senate leaders to formally open negotiations. On Tuesday, House Budget Committee Chairman Paul Ryan, R-Wis., explained their reluctance, saying the pressure of the debt limit is essential to forcing Democrats to agree to the kind of far-reaching changes to Medicare and the U.S. tax code that Republicans see as the fundamental building blocks of a deal.
“The debt limit is the backstop,” Ryan said before taking the stage at a Washington summit on the debt organized by the Peter G. Peterson Foundation. “I’d like to go through regular order and get something done sooner rather than later. But we need to get a downpayment on the debt; we need entitlement reform; we’re very serious about tax reform because we think that’s critical to economic growth and job creation. Those are the things we want to talk about.”
Democrats are urging Republicans to come to the table well before the next deadline. “The American people — all of us — are tired of management by crisis,” Senate Budget Committee Chairman Patty Murray, D-Wash., said at the Peterson summit. “We need to start working now in conference committee.”
But senior Republicans in the Senate, including several who have recently dined with Obama and met with senior administration officials, acknowledged that it would be tough to bring their colleagues to the table too far ahead of the deadline.
“We need to realize this debt ceiling is out there. It’s inevitable, it’s coming. And [the debt-limit delay] should not relieve pressure,” said Sen. Jeff Sessions, R-Ala., the senior Republican on the Senate Budget Committee. But “sometimes we don’t want to act until a gun is at our heads.”
The debt limit is being pushed back in large part because the deficit is falling faster than most anticipated, meaning a substantial reduction in government borrowing.
The Congressional Budget Office estimates that the deficit this year will be $845 billion, though it will soon revise its projections, likely lower. Goldman Sachs recently estimated that the deficit this year will be $775 billion, nearly 30 percent lower than the year before.
As a result of smaller deficits, the nation’s overall debt burden should become sustainable by 2015, at least in the eyes of many economists. The debt burden should begin to decline as a percentage of the size of the overall economy, according to the CBO and many analysts.
There are a number of factors driving deficits lower. Deep spending cuts known as sequestration are trimming back spending on a wide range of domestic programs, as well as the Pentagon. Defense spending is also declining rapidly because of the end of the war in Iraq and the ongoing wind-down in Afghanistan.
But there has also been a noticeable — and for now, durable — slowdown in health care costs, which many economists believe reflect not only a weak economy but fundamental changes in health care spending. In particular, the federal health insurance programs have seen spending moderate in recent years.
Total spending on Medicare per beneficiary, for example, is growing at the slowest rate in history, while spending on Medicaid, the program for the poor and disabled, is in decline.
(Unless low levels of health care spending become permanent, over the long term the deficit is expected grow substantially, in part driven by waves of retiring baby boomers.)
Also closing the deficit are higher tax revenues. Taxes increased for nearly all Americans at the beginning of the year — all workers were affected by an increase in the payroll tax, while the top 1 percent of earners are paying higher marginal income taxes, too. Also affecting upper-income Americans are new taxes associated with Obama’s health insurance law.
The stronger economy is also pushing up Treasury receipts more than anticipated.
The government will automatically come up against the debt limit on May 18, but the Treasury can deploy what it calls “extraordinary measures” — namely, accounting tactics — to create additional borrowing space for several months. In the past that has been two to three months, but the Treasury has been unwilling to say how long the measures will last.
“There are a number of forecast factors, including the effect of higher tax rates on households earning more than $450,000 a year on estimated income tax payments, a strengthening economy, the impact of sequestration on the timing of outlays, the timing of other sizable cash flows, and other forecasting uncertainty which make it difficult to provide a precise estimate as to how long extraordinary measures would last,” Treasury Assistant Secretary for Financial Markets Matthew Rutherford said last week.
Several experts, however, have predicted the Treasury may not run out of borrowing authority until Oct. 1. That depends in particular on a highly technical but important decision by Fannie Mae, the taxpayer-owned mortgage giant, that is expected this week, and its sibling Freddie Mac.
Fannie, and perhaps Freddie, are expected to turn over tens of billions of dollars to taxpayers as a result of their stronger financial footing as the housing market recovers. That money could delay the debt limit by as much as a month.