New Deficits to Force Boost of Debt Ceiling

By WARREN VIETH

Jan. 3, 2002 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

Only four years after celebrating the end of chronic deficit spending, Congress soon will be forced once again to raise the federal debt ceiling so that the government can keep operating.

Treasury Secretary Paul H. O’Neill has notified Congress that the current $5.95-trillion debt ceiling could be breached as early as February. He asked lawmakers to move quickly to raise the limit to $6.7 trillion.

“Sure, it’s a big deal. Instead of having latitude to do lots of things, we’re back to the old business of trying to balance our wishes and our resources,” said economist Susan Hering of UBS Warburg, a New York securities firm. “I’m sure it will loom large in the elections.”

O’Neill blamed the situation on the recession and the Sept. 11 terrorist attacks. “This action is necessary,” he wrote in notifying Congress, “. . . to eliminate the threat of terrorism, restore the American economy to the path of long-term growth and ensure the premier status of the federal government’s debt obligations.”

The outcome is not in question. Failing to boost the ceiling would cause an unprecedented default on payments to holders of government bonds. But the vote will reopen a rancorous debate over the tax and spending priorities of the Bush administration and its allies.

A federal government deficit also could have a broad effect on the long-term economy. Government surpluses are credited with helping drive the robust economic growth of the late 1990s by driving down interest rates and spurring confidence among consumers and business.

The new deficit will foreshadow battles over the 2003 budget that President Bush will submit to Congress in early February and could lead to reconsideration of some of last year’s tax cuts.

“Having to raise the debt ceiling tells us we’ve crossed a certain threshold,” said Robert Bixby, executive director of the fiscally conservative Concord Coalition. “It tells us we can’t count on huge surpluses for as far as the eye can see to bail us out of all of our problems. Some choices are going to have to be made, not in the future, but right now.”

Democrats in Congress are expected to use the debt-ceiling debate to renew their claim that Bush and his Republican allies squandered the surplus with last year’s $1.3-trillion tax-cut package. The administration, which would prefer to keep the debt-ceiling discussion low-key, says its tax cuts have played only a minor supporting role in the short-term fiscal squeeze.

“The economic slowdown had four times the impact on the [current-year] surplus as the tax relief,” Treasury spokeswoman Betsy Holahan said Wednesday.

Under government accounting rules, the debt ceiling eventually would have to be raised even if Washington paid off all of the Treasury securities currently held by the public. That’s because the ceiling applies not only to the publicly held debt but also to the IOUs issued to the Social Security and Medicare trust funds as long as they are running surpluses.

A year ago, the administration said the current debt ceiling--the maximum amount of debt Congress allows the Treasury Department to issue--would provide plenty of headroom until at least 2008, even with the big tax cuts that Bush was seeking. It issued more-conservative forecasts in August, saying the ceiling would not need to be raised until 2003.

The economic downturn and Sept. 11 changed all that. The recession has reduced tax collections and increased spending on unemployment benefits, food stamps, health care and other forms of assistance. Congress passed and Bush signed $40 billion in emergency spending and a $15-billion airline bailout. More spending increases are in the pipeline.

Now there are only a few inches remaining between the ceiling and the debt, which stood at more than $5.94 trillion at the stroke of midnight Dec. 31.

Administration critics acknowledge that the need to raise the debt ceiling within the next few weeks is largely attributable to the economic slump and the war on terrorism, and that short periods of deficit spending are appropriate during recessions.

But they contend that the debt ceiling calls attention to a longer-term fiscal problem caused mainly by the $1.3-trillion tax-cut package sought by Bush and approved by Congress last year. The big tax cuts could cause the government to run deficits year after year, they say, closing a window of opportunity to pay down the public debt to prepare for future revenue shortfalls in Social Security and Medicare.

That window was opened as a result of a series of politically painful budget reforms; tax increases and spending restraints approved during the administrations of Ronald Reagan, the elder George Bush and Bill Clinton; and the economic boom of the ‘90s. The government recorded its last annual deficit in 1997--the last time the debt ceiling had to be raised--and has been operating in the black ever since.

“It was a huge achievement that was destroyed very quickly,” said Caroline Atkinson, senior fellow at the Council on Foreign Relations and a former Clinton administration Treasury official.

“It really is quite like Reagan in the early years,” Atkinson said. “It’s a fundamental shift in the nation’s public finances that occurred with passage of the tax bill last spring. It’s a shift for the worse.”

Atkinson and the Concord Coalition’s Bixby are among those who think Congress should consider rescinding some of the future reductions contained in last year’s tax bill.

“I think that any realistic assessment of our fiscal situation going forward has to include revisiting those tax cuts,” Bixby said. “The situation is so much different than when they were passed.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Where the Surplus Went

Five months ago, the Congressional Budget Office projected a $176-billion surplus for the current fiscal year ending Sept. 30 and a $172-billion surplus in fiscal 2003. It now appears likely that the government will engage in deficit spending both years. Here’s what happened:

2002 2003

August surplus estimate (in billions) $176 $172

Recession effects:

Lower receipts -125 -115

Increased outlays* -15 -15

Terrorism response -26 -20

New discretionary spending -15 -20

Additional interest 0 -2

Expected stimulus:

Unemployment benefits -4 -3

New York City relief -1 -2

Expected budget deficit -10 -5