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How the debt limit delay will affect US fiscal policy

What if hitting the statutory debt limit does not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck.

By Guest blogger / May 27, 2012

A view of the U.S. Capitol building during sunset from Pennsylvania Avenue in Washington in this February 2012 file photo 2012. Gleckman argues that a delay in the statutory debt limit could have serious political consequences.

Jose Luis Magana/Reuters/File

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By now, you know the great taxmageddon story: At the end of the year, a lame duck Congress and a new or newly re-elected president will face the confluence of three extraordinary challenges—the 2001/2003/2010 tax cuts expire, the automatic spending cuts adopted in 2010 begin to bite, and the Treasury loses its ability to borrow new money.

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Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)

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But what if that schedule is wrong? What if that third forcing issue—hitting the statutory debt limit—does not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck.

Here’s what might happen:

Assume President Obama is re-elected. Separating the debt limit from those other fiscal issues strengthens his hand enormously in 2012.

It makes it much easier for him to push Congress to extend the 2001/2003 tax cuts for all but those making $200,000 or more. Without the threat of a government shutdown, congressional Republicans lose their strongest leverage. And they’d have to explain why they forced a tax increase for nearly all Americans in order to preserve tax cuts for a handful of the wealthiest. Worse, they’d look like petulant losers.

The GOP hand will be weakened even more by the Congressional Budget Office’s new estimate that falling off the fiscal cliff would likely throw the nation back into recession.  

Obama could, in that environment, come off as the voice of reason—the role he loves to play more than any other. He could sweeten the pot by offering a deal to delay the automatic spending cuts (which almost no-one supports) and set a date in 2013 by which Congress would enact tax reform and, perhaps, additional spending reductions. He’d try to work a debt limit extension into the mix too. But worse case, he could put it off until say, March of 2013.

The more interesting speculation, however, is about what happens if Mitt Romney is elected President. If he wins in November, there will be no living human in America more anxious to have the debt limit resolved in 2012 than Romney. He would, I suspect, give up almost anything to avoid having to face the debt limit shortly after he is sworn in. I can hardly think of a less auspicious start to his presidency than a knock-down drag-out brawl over increasing government borrowing.

Just think about it. If he asks for a debt limit increase as one of his first acts in office, already-skeptical tea partiers would abandon him in droves. If he didn’t, and allowed the nation’s borrowing authority to expire….Well, no self-respecting ex-Wall Street guy is going to do that.

As a result, a newly-elected Romney would put enormous pressure on congressional Republicans to make the debt limit issue go away. In 2012. That would mean convincing the lame duck Congress to quietly pass a one or two year increase.

Just defeated Democrats, who have spent the past year ripping Republicans for irresponsibly holding the debt limit hostage would, of course, switch roles and hold the debt limit hostage. Their price for dealing: Tax increases. Big. Fat. In-your-face-Grover-Norquist tax increases.

So watch what happens to that debt limit deadline. It could change everything.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on taxvox.taxpolicycenter.org.

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