Countdown

The row over the debt ceiling is going down to the wire

jul 7th 2011 | WASHINGTON, DC | from the print edition

THE stand-off over America’s debt ceiling has entered strange territory: pretty much everyone agrees the limit will be raised, but it is becoming ever harder to see just how. The Treasury reckons it will run out of cash on around August 2nd. But with time running short, the parties seem as far apart as ever.

Taxes are the sticky wicket. While both sides agree that the ceiling should be raised in conjunction with new deficit-reduction measures, they have fallen out over whether to use increased revenues to close part of the gap. The blame for this impasse falls mostly on Republicans. Eric Cantor, the leader of the Republican majority in the House of Representatives and the chief Republican negotiator in talks chaired by Vice-President Joe Biden, greeted a recent proposal to pair $2 trillion in spending cuts with $400 billion in new revenues by walking out on June 23rd.

Matters have been testy ever since, and the strain is showing. Rumours are flying that Tim Geithner, the treasury secretary and the last remaining holdover from Mr Obama’s original economic team, is eager to step down once a debt deal has been reached. Both Mr Geithner and the White House deny the rumours, but the constant battle with a stonewalling opposition has surely taken a toll.

Republican intransigence is difficult to fathom. Government revenues as a share of output are low by international standards and have fallen in recent years (see chart). A report produced in March by congressional Republicans noted an 85% to 15% spending-to-revenue split was the average for a successful fiscal consolidation. They have essentially achieved that; the $400 billion in revenue rises on offer is just 17% of the total proposal. And the president has since sweetened the deal. He backed away from an effort to lift marginal tax rates on the rich, offering instead to raise money by closing loopholes. Republicans have still demurred; they consider eliminating loopholes tantamount to raising taxes, though it could equally be argued that it is the same as cutting spending.

On July 6th, Mr Cantor reiterated that position; he is open to closing loopholes, he said, but only if they are offset by tax cuts elsewhere. Secret talks have taken place between Mr Obama and the House speaker, John Boehner, and the Democrats are said to be offering cuts of as much as $4 trillion, including to spending on Medicare and Medicaid and even on Social Security (pensions)—a key Republican goal. Yet there is great unease at all this on both sides. Some Republicans are clamouring to include still more in any agreement, including a cap on spending at 18% of GDP and backing for a balanced-budget amendment to the constitution. Both are anathema to Democratic leaders.

The White House, in turn, may be stiffening its strategy. Twice in recent days the president has publicly criticised Republican obstinacy and called for concessions from both sides. Meanwhile, Democratic operatives are exploring a “constitutional option”. Some scholars have suggested that the debt limit may violate the 14th amendment, leaving the president free to ignore it come August 2nd. Mr Obama has declined to rule this out.

The president may calculate that these shifts will weaken the Republicans’ position and bring them back to the table to talk about revenues. The risk remains that both parties may retreat to their trenches while the clock ticks down. Economists say a default would be catastrophic. To delay one, the Treasury would prioritise interest payments on the debt above other government obligations. But this too would carry significant economic costs. A new analysis by the Bipartisan Policy Centre finds that on running out of cash, the government would need immediately to slash spending by 44%. Cuts would hurt pensioners, public employees (including soldiers) and state governments, almost all of them already badly squeezed. The public outcry would surely force a rapid deal, but the economy would suffer serious damage in the meantime