A Look At The H1 2011 Fiscal Calendar With An Emphasis On The "Debt Ceiling"

Goldman's Alec Phillips has compiled a great docket of key events on the US fiscal calendar for the first half of 2011, of which easily the biggest wildcard is the initiation of the debate debt ceiling increase. While Zero Hedge believes that most of the rhetoric surrounding this issue is primarily of a polemic nature, with lots of ins, lots of outs, and most certainly lots of theater, the ceiling will be passed right on cue, by anywhere between $1.6 and $2.0 trillion: enough to fund the deficit for the next year and leave a small buffer. One thing is certain: discussion will most certainly not commence until as late as possible, which means sometime in late March, early April (as such we urge readers to aggressively sell the InTrade Feb 28 "debt ceiling" contracts).

From Goldman Sachs, A Step-by-step Guide to Upcoming Fiscal Events

  • Congress returns to session this week, with fiscal matters the top priority. New rules governing consideration of budget-related legislation may be considered in the House in the next few days and legislation to repeal health reform could be voted on by next week.
  • The standard fiscal events that take place early in the year will also be much more significant than usual. President Obama’s State of the Union Address in late January and his budget in mid-February both look likely to focus on deficit reduction.
  • The debate over raising the federal debt ceiling is likely to be the most significant fiscal debate this year; the limit probably will be reached in late March or April, but the Treasury is likely to be able to extend its borrowing authority for another couple of months using a variety of accounting-related strategies.

Congress returns on Wednesday, and will immediately begin to consider legislative changes that could have an impact on fiscal policy. What follows is a guide to some of the key fiscal policy events over the next few months, in rough chronological order:

January 5: An early start on fiscal issues in the House of Representatives.  Most new congresses start slowly, with little action prior to the president’s State of the Union Address (see below). However, the new Republican majority in the House of Representatives looks likely to move quickly on several fiscal policy fronts.   The first action that House Republicans will take this year is to pass rules for the 112th Congress, which should be considered on the House floor on January 5.  These include several fiscal rules changes that will apply to legislation considered in the House:

1. “Cut-as-you-go”:  This would replace the current “pay-as-you-go” requirement under the House rules, by prohibiting consideration of legislation that increases net mandatory spending over one, five, or ten years, though it remains silent on revenue changes. This would require all new programs to be paid for with spending cuts elsewhere in the budget, rather than tax provisions or deficit spending.  However, like the current rules, “cut-as-you-go” would exempt “emergency” legislation.

2. Ending the “Gephardt Rule”:   Under current House rules,  a debt limit increase is automatically deemed to have passed once a final budget resolution is agreed to (the mechanics are somewhat complicated, but this is the essence of the rule).  This rule has applied more often than not since it was first implemented in the House for fiscal year (FY) 1980, and has allowed House leaders of both parties to avoid forcing politically painful votes to increase the limit. With its repeal, raising the debt limit becomes slightly harder, though it is worth noting that the Senate has never had such a rule but always manages to cobble together the votes for an increase.

3. Highway spending:  The new rules would prohibit the House from considering legislation that authorizes infrastructure spending funded by the highway trust fund above the level of receipts. The fund currently runs a deficit of around $10 billion per year, which Congress has made up in the past through one-off appropriations to fill the gap.

4. Limiting the reconciliation process: Under current rules, the budget reconciliation process allows legislation to move through Congress under expedited procedures (including a simple majority vote in the Senate) as long as it follows instructions laid out in the most recently adopted budget resolution.  House Republicans would retain the process, but would prohibit its use to pass legislation that would increase net spending.  This should have little effect for the next two years, since split control of Congress makes the process much less effective than it has been over most of the last decade and is likely to reduce its use regardless of any limitations imposed.

5. Exemptions for tax legislation and repeal of health reform.  In determining whether legislation has an effect on the budget, the impact of extending the 2001/2003 tax cuts or repeals the recently enacted health law would be exempt.

It should be noted that while the changes to House rules have received a good deal of attention, they do not apply to the Senate, nor do they change any of the budget-related laws currently in place (such as the PAYGO law enacted in 2010). While these new rules could come into play from time to time, it is split control of Congress, rather than budget rules, that will be the limiting factor for most budget-related legislation.

Mid-January: House votes on health law repeal.  The House may vote as soon as next week (probably January 12) to repeal the health reform law enacted last year. CBO estimates that the law would reduce the federal deficit by $143 billion from 2010 through 2019, which implies that repeal of the law would be estimated to raise the deficit by a similar amount. However, this is mostly an academic point since the Senate is unlikely to muster the 60 votes that would probably be necessary to pass a repeal in that chamber, and the president would almost surely veto it in any case. 

Late January: CBO updates its budget projections.  The Congressional Budget Office (CBO) releases its updated budget projections for the current and next ten fiscal years, which were last updated in August.  These estimates are typically complicated by CBO’s legislative mandate, which requires that it assume the expiration of major provisions of law as they are written, even if they are widely expected to be extended. This is less of an issue for the fiscal year (FY) 2011 estimate, since the upcoming estimates will reflect the extension of expiring tax provisions enacted a few weeks ago, as well as the effect of the reduction in payroll taxes and renewal of emergency unemployment benefits.  However, since the latter items expire at the end of 2011 and the tax cuts expire at the end of 2012, CBO’s five- and ten-year projections are still likely to underestimate the size of the deficit that would occur under more realistic policy assumptions. We recently revised our own deficit estimates to $1.3 trillion (trn) and $1.05trn for 2011 and 2012 respectively, in light of our stronger growth outlook and the effects of the fiscal package enacted a few weeks ago (see “Budget Deficit Modestly Higher, But Coupon Auctions Still Adequate,” US Daily, December 21, 2010). We expect to update our 10-year projection once CBO has released its estimates. 

Late January: President Obama delivers his State of the Union Address.  The President is expected to deliver his annual address to Congress on January 25.   The upcoming State of the Union is likely to be the president’s most important to date, since he  (1) is likely to indicate what his policy focus will be for the next two years, and (2) may signal to what degree he will attempt to compromise with Republicans in Congress.  A message of fiscal restraint is likely to be delivered in this speech, and it would not be surprising to see a few specific proposals to reduce spending introduced, potentially including items borrowed from the fiscal commission's recommendations.
January 31: The Treasury submits its recommendations for GSE reform to Congress. The Treasury is required under the Dodd-Frank Act to submit an outline for reform of the GSEs by January 31, though this might occur before (or potentially after) this date. The issue has obvious ramifications beyond the budget, but from a fiscal perspective the main point to make is that GSE reform legislation is unlikely to impact the deficit for the next couple of years, for two reasons: first, enactment of reform legislation before the upcoming presidential election in 2012 looks doubtful, so the Treasury is likely to continue to provide the GSEs with capital as it has done since 2008, albeit in smaller increments. Second, whatever program is eventually agreed upon will likely be phased in over several years, so the associated budget effects are also likely to be gradual.

Mid-February: The president submits his budget proposal to Congress.  The president’s budget will include the detail behind whatever proposals he makes in his address to Congress, as well as alternative budget projections based on the White House’s economic assumptions. While there are always surprises in the budget, we suspect that the most significant proposals will have been unveiled in the State of the Union. Normally, the budget is submitted on the first Monday in February, but the delay in confirming Jack Lew, the recently appointed Director of the Office of Management and Budget has led the administration to delay submission by a week (probably to February 14).

March 4: Current stop-gap spending authority expires. Since Congress has yet to enact full-year appropriations for the fiscal year that began on October 1, 2010, it has instead extended spending authority at the current levels through March 4, with the expectation that Congress will enact appropriations legislation by then.  House Republicans have proposed reducing non-defense discretionary spending to “pre-stimulus, pre-bailout levels,” which they estimate would save over $100 billion in the first year. While this proposal appears aimed more at FY2012, (replacing the non-defense discretionary spending levels projected in the CBO baseline in 2012 with actual 2008 outlays would reduce nominal spending by $167 billion), House Republicans will probably push to make at least incremental cuts to what remains of FY2011, as a show of fiscal discipline ahead of an eventual vote to raise the debt limit.

April:  Debt ceiling reached?  As of December 30, the public debt subject to limit (generally speaking, this includes debt held in the form of Treasury securities by the public and in government trust funds) stood at $13.871 trillion, or $423 billion under the $14.294 trillion statutory limit [this number is $150 billion less as of December 31, as Zero Hedge pointed out yesterday]It is difficult to estimate exactly when the Treasury will reach this limit, but using the seasonal pattern of increases in the public over the last two years as a guide, the limit seems likely to be hit in late March or April.

Once the ceiling is reached, the Treasury is prohibited from issuing further debt securities until Congress has increased it.  The congressional debate over the debt ceiling is clearly shaping up as a catalyst for enactment of broader fiscal reforms, though how significant those reforms are remains to be seen. During the process, it seems likely that some of the recommendations from the president’s fiscal commission will be considered, along with other proposals focused mainly on spending cuts and budget process reforms.

This debate is likely to take time, and probably won’t start in earnest until the debt limit has been reached or is at least very close at hand. In order to buy time while Congress considers an increase, the Treasury has a variety of strategies it can use to reduce the amount of outstanding debt that counts toward the limit. The most important of these strategies, and also the newest, is to draw down the Supplemental Financing Program (SFP), which currently accounts for $200bn in outstanding debt, the proceeds of which are on deposit at the Fed. The SFP was drawn down in late 2009 ahead of the last debt ceiling increase; a few months after Congress raised the limit, the SFP balance was returned to $200bn.

Apart from the SFP, the Treasury has several time-tested methods of making ends meet until Congress agrees on an increase. The two most common strategies are (1) suspension of issuance of State and Local Government Series (SLGS) Treasury securities and (2) suspension of investment in Treasury securities by federal employee retirement funds (for instance, the so-called “G-fund” of the Thrift Savings Program, a 401k-like option for federal employees).  The Treasury can gain a bit more flexibility by also (3) tapping its Exchange Stabilization Fund (ESF) or (4) exchanging debt subject to limit that is held by federal employee retirement funds with debt held by or issued by the Federal Financing Bank (FFB) that is not subject to the limit.  While these strategies have historically provided the Treasury a good deal of flexibility, current financing needs are much greater than it was in previous debt limit debates. For instance, assets in the G-Fund are a bit over $100bn, and the ESF is roughly half that, while the FFB has a $15bn limit on issuance. In some previous episodes this could have bought the Treasury several months of additional room under the limit, but they would create only a few weeks worth of additional room under the limit at the current rate of growth in the public debt.

Ideally, Congress would raise the limit before any of these steps prove necessary. But in the event that it does not, the Treasury can probably get by for at least a couple of months using the SFP along with its other traditional strategies.      

April/May: Congress debates the budget resolution for FY2012. Congress usually begins putting together the budget resolution for the coming fiscal year in March, with House and Senate passage of their respective resolutions in April. The formal deadline for the House and Senate to approve a final version of the budget resolution is April 15, but this deadline is almost never met.  Moreover, Congress has failed to enact any budget resolution at all in several recent years (1998, 2002, 2004, 2006 and 2010). Recent failures can be attributed mostly to election-year politics, but split control of Congress will make enactment of a budget resolution this year difficult as well, and at a minimum should delay final enactment until well past the official deadline. Although the budget resolution is usually one of the key fiscal events each year, it is likely to be less important this year, since (1) spending cuts and/or changes to fiscal rules could be debated as part of the increase in the debt ceiling, and (2) the most important feature of the budget resolution—instructions to enact budget reconciliation legislation—are unlikely to come into play this year given the split control of Congress.
Alec Phillips


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