Source : THE AGE NEWS
Donald Trump’s inauguration and expectations of the tumult he will release on “Day One” of his administration have deflected attention from the emergence of a familiar threat to US economic and financial stability: a breach of its absurd debt ceiling.
The breach of the $US36.1 trillion ($58.2 trillion) ceiling on what the US government can borrow will be temporarily averted when US Treasury begins taking “extraordinary measures” – initially suspending contributions to federal retirement funds while redeeming some contributions – on Tuesday, a day after the inauguration.
Trump was attempting to force the Biden administration to take the responsibility for raising the ceiling and for the additional debt the US will incur. Now that will happen on his watch.Credit: AP
Outgoing US Treasury Secretary Janet Yellen said the funds would be made whole after Congress takes action on the ceiling but was unable to say how long the measures would defer the moment when Treasury runs out of cash and causes the government to default on its financial obligations.
There are further measures that could be taken – standing down federal employees, including defence personnel, without pay and shutting down non-essential government operations – if necessary, but a shutdown would probably lead to further credit rating downgrading and higher interest costs.
After considerable wrangling and brinkmanship last year (and, it seems, most years of recent administrations) the debt ceiling was suspended until January 2, with Joe Biden agreeing to cap spending at fiscal 2023 levels with only a one per cent increase in spending this financial year.
In December, a bill to extend (but not raise) the debt ceiling deadline until March 14 and provide $US100 billion of disaster aid was almost scuttled when Trump, after urging from Elon Musk, demanded that either the ceiling be raised or the ceiling abolished. It passed with considerable help from the Democrats but considerable opposition from hardline Republicans.
Trump was attempting to force the Biden administration to take the responsibility for raising the ceiling and for the additional debt the US will incur. Now that will happen on his watch.
The debt ceiling is an absurdity, given that it relates to borrowings for spending already approved by Congress, but has become a fulcrum for the leverage for spending cuts fiscal conservatives try to exploit every time US debt levels approach it.
It has always been resolved, in recent years almost always at the eleventh hour, because the consequences of the US defaulting on its debts are unpalatable to both sides of US politics.
Moody’s Analytics said during an earlier stand-off that a default would produce outcomes similar to the 2008 financial crisis, with more than 7 million jobs lost, a near 20 per cent fall in the sharemarket and $US10 trillion of household wealth evaporated.
It will be resolved, again, this time for the same reasons but, unlike more recent episodes, this time it will be the Democrats – traditionally more opposed to the ceiling’s existence than Republicans – who will have leverage enhanced by divisions with the Republican Party between Trump’s MAGA devotees and the fiscal conservatives.
US Treasury Secretary Janet Yellen was unable to say how long the measures would defer the moment when Treasury runs out of cash and causes the government to default on its financial obligations.Credit: AP
Trump’s agenda, particularly the extension of his 2017 tax cuts that are otherwise scheduled to expire in December, would add substantial new debt to Americas’s existing borrowings. The Congressional Budget Office (CBO) has costed an extension of the tax cuts at $US4.6 trillion over a decade.
There’s also Trump’s campaign promises of removing taxes on tips, overtime, social security benefits and increasing the cap on federal tax deductions for state and local taxes.
The Committee for a Responsible Federal Budget has said that eliminating the tax on tips alone would cost the government about $US200 billion over a decade. It costed Trump’s overall policies at a net $US7.75 trillion over a decade.
Trump is expected to start his second term as president with a barrage of executive orders on “Day One”, including the declaration of a national emergency at the US-Mexico border, a rescission of the Biden administrations diversity, equity and inclusion policies, the withdrawal of limits on drilling offshore and on federal lands and new rules to change the way federal employees are hired and fired.
There are significant costs associated with Trump’s plan to deport millions of illegal immigrants and other elements of his agenda, the most financially significant of which is the extension of the tax cuts. Resolving the debt ceiling blockage to new spending will be critical to implementing his plans.
Getting the fiscal conservatives onside may involve big cuts to government spending, which is what Elon Musk and Vivek Ramaswamy have been charged with doing in their so-called “Department of Government Efficiency” (it’s not a government department but an advisory council).
Musk’s original target of $US2 trillion of cuts to spending has been watered down to “only” $US1 trillion, but even that would, with defence spending regarded as untouchable, involve swingeing cuts to social welfare and Medicaid programs that Trump promised wouldn’t be touched.
The debt ceiling is an absurdity but has become a fulcrum for the leverage for spending cuts fiscal conservatives try to exploit every time US debt levels approach it.
Biden’s ambitious green energy policies, including tax credits for electric vehicles and emissions limits on internal combustion engines, will inevitably be gutted but won’t produce anything remotely close to the savings necessary to stabilise or reserve the build up in US government debt.
The CBO last week released its latest projections for US government debt and deficits, based on current policy settings – in other words without considering the Trump agenda.
It said national debt was on an “unsustainable upward trajectory”, with debt projected to eclipse its record level as a share of the economy in 2029 – a record set just after World War II – and climb to 118 per cent of GDP by 2035. It’s currently about 99 per cent of GDP.
The budget deficit for this financial year is expected to be 6.2 per cent of GDP but fall to 5.5 per cent when the Trump tax cuts expire. Should those tax cuts be extended, deficits would be $US4.6 trillion higher and the debt-to-GDP ratio would grow to 129 per cent of GDP by 2035, it said.
The Republicans are planning to put together a blockbuster bill to finance Trump’s suite of policies and include the effects of his immigration, trade, tax and social welfare policies, and have been contemplating an argument that extending tax cuts that are, by law, scheduled to expire doesn’t involve increased spending.
It does, however, involve that $US4.6 trillion of debt and the interest costs associated with it. The CBO projections have net interest costs at $US952 billion, equalling a record 3.2 per cent of GDP this financial year and hitting $US1 trillion in 2026.
The yields on 10-year bonds have, however, jumped about 50 basis points since the CBO compiled its projections so the $US1 trillion mark could be achieved this year unless the US slows or halts the spiralling of its deficits and debt.
As the debates about the debt ceiling warm up again, particularly the internal debates among the congressional Republicans, that outlook of ballooning debt and the costs and risks associated with it will shape the nature of the economic agenda in Trump’s second and final term. The resolution of the breach of the debt ceiling could play a meaningful role in determining what that looks like.
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