That means that Congress and the White House could be forced to come to a significant deficit agreement before February, even if they simply decide to extend all the tax cuts and suspend the sequester before the new year. Otherwise, the debt ceiling could not only threaten the markets but also cost the government even more than it's already spending.
The Bipartisan Policy Center predicts that we'll actually reach the debt limit the last week of December, but the Treasury can use so-called "extraordinary measures" to buy the country some more time. It could, for instance, raise more cash by temporarily divesting from government bonds for government employees' retirement savings, among other measures to reduce the debt for a short period of time. Altogether, the center believes that the government could raise $197 billion through such measures, which would be enough to stave off the debt limit until February 2013.
It'd be very difficult for the government to buy more time than that: Even if we had sharp, sudden austerity and let the entire package of spending cuts and tax hikes take effect on Dec. 31 — i.e. go over the cliff — it would only buy the government another week or so, the BPC estimates. And both parties agree they don't want deficit reduction to happen that quickly, preferring major changes to happen further down the road.
As such, it won't be possible to avoid hitting the debt limit for very long. By the BPC's estimates, we'll have to raise the debt limit by anywhere between $730 billion and $1.25 trillion to avoid the debt ceiling for all of 2013 (depending on whether the Dec. 31 fiscal changes measures are enacted or not) and between $1.3 trillion and $2.2 trillion in 2014.
Democrats say they won't agree to a big deficit reduction package unless it deals with the debt limit as well. "The president isn't going to sign off on any agreement that doesn't include some certainty, as to budget, appropriations, dealing with our debt ceiling. We're not going to find ourselves with some big party celebrating in February, then turn around in March and have another to hit another doomsday scenario," said Sen. Richard Durbin (D-Ill.) in a speech Tuesday morning. "We've got to get this done as a package."
The irony is that another political fight over the debt ceiling could cost the government even more money. The Bipartisan Policy Center has calculated that last year's debt ceiling fight will ultimately cost taxpayers $18.9 billion over 10 years, due to elevated interest rates between January and August 2011. "This is what they wasted last year," said Steve Bell of the center, and a former GOP Senate aide.