“I don’t go looking for trouble. Trouble usually finds me.” – Harry Potter
Outside of the rancor of the election, we have enjoyed a relatively quiet year for U.S. policy. The Biden administration has not pushed for major legislation, and Congress has not needed to react to any crises. But an end to the calm is foreseeable as the fiscal year ends and the debt ceiling returns to force.
Setting a budget with over $6 trillion of outlays is no simple matter, let alone obtaining bipartisan agreement for the proposal. Routinely, Congress temporarily extends the prior year’s budget through a continuing resolution (CR) after the fiscal year starts October 1. But each CR vote brings an opportunity for conflict, raising the risk of a funding gap and government shutdown. Just last week, a draft CR bill was dropped due to its complexity, leaving little time for a new measure. A shutdown looms at the end of the month if a CR does not pass.
The next President could be greeted by a budget crisis.
The budget specifies the nation’s spending plans, which outpace its tax receipts, requiring continual debt issuance. The U.S. Treasury issues debt, up to a limit that is set by the Congress. Occasions where the ceiling must be raised can be used to extract concessions from the President.
The deal that ended the last debt ceiling showdown in 2023 rescinded the limit through the end of this year. It will bind at whatever level of debt is outstanding on January 2, 2025. At current funding levels and with typical quarterly tax collections, the nation can stay afloat into summer of 2025. After that, a new agreement will be needed, just as negotiations over the nation’s tax laws also kick into high gear. The 2023 showdown brought a high degree of volatility and risk of a technical sovereign default, which would be a seismic event in financial markets. The nation lost its AAA credit rating from Fitch in the wake of the incident. More brinksmanship may bring more consequences.
If the election yields unified control of government, the necessary bills should pass without conflict, though the nation’s fiscal health will worsen. And if Washington is divided, getting through the year ahead without some sort of fiscal stress will be an act of expert wizardry.
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