President Trump will have to deploy “extraordinary” measures in two weeks to avoid a default on the debt if Congress does not move to raise the federal borrowing cap, a little-recognized deadline that could expedite his showdown with Congress over taxes and spending.
Trump has proposed giant cuts to tax rates for businesses and individuals, as well as new spending on infrastructure and military programs. His advisers have said those changes will boost the economy, creating more money for government spending.
“The money is going to come from a revved-up economy,” he said Tuesday morning on Fox News.
But critics have said the changes Trump is pursuing are likely to inflate the federal deficit for more than a decade.
In his speech to Congress on Tuesday night, Trump is likely to try to pry Republicans away from their multiyear effort to shrink the deficit. But although many are expecting a long, drawn-out debate over tax reform and budget goals, the looming debt-limit deadline could bring far more urgency to the matter.
Once Trump, acting through the Treasury, launches “extraordinary” measures — such as a suspension of payments to certain pension programs — it begins a countdown for Congress to vote to allow continued borrowing. Budget experts believe the measures will allow borrowing only in August or September.
Congressional aides said these discussions are not yet at advanced stages.
Throughout President Barack Obama’s term, Republicans used debt-ceiling deadlines as a cudgel to compel the administration to accept budget changes that would limit federal spending. Several times, the nation careened toward a potential default on the national debt before a last-minute agreement kept the government funded. In 2015, the Obama administration and Congress agreed to suspend the federal debt ceiling until March 15, 2017.
After that date, the Treasury Department is expected to enact “emergency” measures to buy more time to allow the government to continue paying its bills. These emergency steps often include actions such as suspending pension payments, but the Treasury Department runs out of flexibility after several months.
During the conflicts with Obama, Republicans at one point tried to ban the use of these measures.
Budget experts believe that by August or September, if Congress has not acted, the Treasury could begin falling behind on payments, potentially triggering a new crisis over whether the government will default.
Republicans have not said whether they will pursue the same approach with the Trump administration. Although GOP lawmakers may be less likely to confront a Republican president, they might also be reluctant to give up on the anti-debt, budget-cutting principles they have long advocated.
Indeed, during his confirmation hearing to become the new head of the Office of Management and Budget, Mick Mulvaney, who was a leading Republican congressman favoring budget cuts, cast doubt on the risks of flirting with the debt limit.
“I do believe that defaulting on America’s debts would have grave worldwide economic consequences,” Mulvaney said in his written confirmation documents. “I do not believe that breaching the debt ceiling will automatically or inevitably lead to that result.”
Congress faces another deadline on April 28 to fund government operations or risk a partial shutdown, though it could easily decide to simply continue funding the government at current levels until a broader appropriations bill is passed.
Trump’s budget approach so far — boosting spending and slashing taxes — would force many Republican lawmakers to pivot away from their demand that the deficit be eliminated within 10 years.
Even without any of Trump’s proposed changes, the federal government is projected to spend $4.09 trillion in the fiscal year that begins Oct. 1, according to the Congressional Budget Office.
The CBO projects that the government will bring in $3.60 trillion during that period through taxes and other revenue, leaving a $487 billion deficit. This equates to 2.4 percent of U.S. gross domestic product, which is relatively small compared with that in recent years. But the CBO expects the deficit to widen markedly after that, driven in part by rising costs associated with interest payments on U.S. debt.
Total U.S. debt is approaching $20 trillion. Trump told The Washington Post in an interview last year that he believed he could eliminate the entire debt within eight years in part by restructuring trade deals, but Republican lawmakers have never said they thought this was achievable.
The deficit is the annual gap between tax revenue and spending, and the debt is the total amount of money the government has borrowed to finance its operations over many years.
Trump has most recently focused his economic plan not on deficit reduction but on job creation and economic growth. His initial pledges — both on spending and tax policy — suggest deficit reduction is not a near-term priority, and budget experts believe his changes could expand the deficit markedly in the next few years.
He and his aides want to increase military spending and put together a structure that could facilitate as much as $1 trillion in new infrastructure spending. He has proposed spending cuts on programs such as foreign aid, though it is unclear whether he could find enough to offset the $54 billion in additional military spending he called for Monday.
If spending levels — at least in the near term — remain flat, the only way to reduce the deficit is to bring in more revenue. But Trump has said he plans in the coming weeks to propose sharp cuts in corporate and individual tax rates. He has proposed cutting the top individual income tax rate from 39.6 percent to 25 percent and cutting the corporate tax rate from 35 percent to 15 percent (although Republicans have also said they would consider corporate tax rates of between 20 percent and 25 percent). The nonpartisan Tax Policy Center has estimated that Trump’s changes would reduce tax revenue by $9.5 trillion over 10 years.
Obama entered office in 2009 calling for new spending and tax cuts as a way to arrest the Great Recession, and Trump’s proposals — though designed differently — are also aimed at stimulating the economy. But Republicans have often splintered in budget talks, with some pushing for more military spending and others holding a harder line on eliminating the deficit.
Trump, so far, is not trying to bridge these GOP factions. And his aggressive push for deep tax cuts and new spending has emerged as one of many areas where Republicans are divided as they start efforts to legislate his campaign platform. They have not reached consensus on how to replace the Affordable Care Act, whether to create a border adjustment tax as a way to penalize U.S. companies for moving jobs overseas, and how to attempt changes to immigration rules.
Some of the White House’s key architects on these efforts — such as National Economic Council Director Gary Cohn and Treasury Secretary Steve Mnuchin — are seasoned dealmakers from real estate and banking backgrounds who have experience at setting ideology aside and cutting deals. But others — namely chief strategist Stephen K. Bannon and top adviser Stephen Miller — are seen as conservative purists less likely to budge.
Trump advisers have rejected these sorts of projections, and he has said that his steep tax cuts would unleash a huge economic boom that boosts earnings, hiring, corporate spending and, ultimately, brings in more money.
Mulvaney has been in office less than two weeks, and no member of his senior economic team has been part of putting together a federal budget before. Trump could find he needs to rely on House Speaker Paul D. Ryan (R-Wis.), a veteran of budget battles, but Ryan’s past budget blueprints have sought large savings through major changes to Medicaid and other programs for the poor, such as the Supplemental Nutrition Assistance Program.
It is still too early to determine whether Trump and his team will forge ahead or try to cut a deal with congressional Republicans who want major cuts to reduce the deficit.
Mulvaney has not signaled how the White House will proceed beyond the summer. Asked about this on Fox News on Monday, he said, “We will deal with it.”