Higher revenue, lower spending might mean debt limit breather


House Budget Committee Chairman Rep. Paul Ryan (R-Wis.) holds a copy of President Obama's fiscal 2014 budget proposal on April 12, 2013, during a House Ways and Means Committee heairng on Capitol Hill. (J. Scott Applewhite/AP)

The next battle over the federal debt limit appears to be further away than many expect — and perhaps not until well into autumn.

Higher tax revenue, lower spending and a potential inflow of money from the recovery of the taxpayer-owned mortgage finance companies Fannie Mae and Freddie Mac mean the government may not have to borrow as much as expected in coming months, analysts say.

And that would mean more time for President Obama and Congress to come up with an agreement to raise the $16.4 trillion debt ceiling.

Earlier this year, Congress agreed to suspend the debt limit through May 18 — and raise it on that date to account for any borrowing done in the meantime. But once the limit is back in place, Congress will have to raise it to accommodate additional borrowing needed to continue funding the government.

The Treasury Department can use several accounting measures to delay the date by which Congress has to raise the debt. Those measures typically buy two to three months of time. The department hasn’t said precisely how much breathing room it expects to gain.

While there has always been a bit of politicking around the debt limit, it has become far more polarized in recent years. In the summer of 2011, Republicans demanded deep spending cuts in exchange for raising the ceiling. Negotiations between GOP leaders and the White House dragged on, bringing the country within a few days of breaching the limit. If that had happened, the Obama administration said, an unprecedented default on the national debt would be imminent.

Republicans agreed to delay the debt limit debate in the fall and haven’t yet indicated what they will do the next time around. Obama has pledged not to negotiate over the ceiling.

Earlier this year, the Bipartisan Policy Center, which has compiled accurate debt limit forecasts in the past, estimated that the Treasury Department could probably use its accounting techniques — which are called “extraordinary measures” — to delay the ultimate deadline until sometime in August.

But now, it is increasingly likely that Congress will have until September or October to raise the limit, said Steve Bell, the center’s senior director of economic policy

A precise forecast isn’t possible yet, Bell said, but “most of the forces are pushing the date a little later.”

A number of factors are at play. Tax revenue this year has been greater than many expected — the result of a stronger economic recovery and tax increases taking effect at the beginning of the year.

What’s more, the deep spending cuts known as sequestration mean that domestic and defense spending is starting to fall swiftly. That reduces the Treasury’s need to borrow.

And then there is an another unexpected wild card: the government-backed mortgage finance giants Fannie Mae and Freddie Mac.

During the financial crisis, taxpayers bailed out Fannie and Freddie. But under the bailout agreement, taxpayers have a right to seize the companies’ profits. And with the recovery of the housing market, that has been billions of dollars.

Soon, the firms could release tens of billions of dollars to taxpayers. That’s because they were forced to reduce the value of special tax assets worth close to $100 billion during the financial crisis. But with the market’s recovery, the assets are likely to regain their value soon.

Because of accounting rules, Fannie and Freddie would be forced to recognize the increase in value as profit — and turn it over to taxpayers. Fannie has suggested that might occur this spring — and said it could turn over about $60 billion. Freddie appears to be behind in the process.

“Treasury could reap a much larger windfall if [Fannie and Freddie] release valuation allowances for deferred tax assets,” analysts at Stone McCarthy Research said in a recent research report. “If that occurred at the end of June, the extra cash could help Treasury navigate any debt limit crisis this summer.”

“Any additional cash will make navigating the next debt limit crisis, if there is one, that much easier,” the analysts added.

The debt limit is likely to automatically jump to $16.8 trillion on May 18. Borrowing needs vary from month to month, but the ceiling may not be reached until later into the fall because September is a month when the Treasury receives a large amount of tax revenue due to quarterly filings.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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