Your guide to the coming fiscal kerfuffle

“I’ll play chicken with you every time.” – Then-Representative Mick Mulvaney (R-SC); now the Trump administration’s chief budget writer, in response to a warning not to play chicken with the debt ceiling.
 
A game of fiscal chicken grows more likely as we draw closer to two critical budget deadlines.
 
This summer or fall, the federal government will run out of its ability to move cash around to avoid exceeding the debt ceiling. This means that without a change to the debt ceiling the government will be unable to pay some of its obligations, such as payments on debt or disbursements for some government programs.
 
Also, the new federal fiscal year begins on October 1. Including this week, there are only seven legislative weeks until Congress’ summer break, and there are ten legislative weeks in the House (11 in the Senate) leading up to October 1.
 
The pressure is on. You’ll be hearing words like “shutdown showdown,” “clean debt ceiling increase,” and “first-ever default” many times over the next several weeks and months. Here is a layman’s guide to the meaning of many terms you’ll hear –
 
Debt limit – Since 1917, the federal government has had a self-imposed legal ceiling on the amount of debt it can hold. The national debt now stands at roughly $19.9 trillion. This figure includes both debt held by the public (including foreign holders of debt) and debt held by other federal government accounts, such as Social Security.
 
“I think the whole issue of a debt ceiling makes no sense to me whatsoever. Anybody who is remotely adroit at arithmetic doesn't need a debt ceiling to tell you where you are.”
-- Alan Greenspan, former Chairman of the Federal Reserve
 
The debt limit was suspended by law from November 2, 2015, through March 15, 2017. When the limit was reinstated in March at the existing level of debt, the government immediately took actions to ensure it was not borrowing more than the limit.
 
Extraordinary measures – When the legal debt limit is reached, the Department of the Treasury has the ability, for a time, to manage cash so that debt does not exceed the limit. These actions are called extraordinary measures and include suspending the issuance of new debt and limiting investments by certain government accounts.
 
Treasury is currently using extraordinary measures, but its ability to keep using them will be exhausted soon.  Treasury now believes that the debt ceiling needs to be increased by Congress before it leaves for its August recess, although the exact timing of when extraordinary measures can no longer be used depends largely on the flow of cash into the Treasury.
 
Default – If the government is unable to pay the principal or interest on its debt, it is in default. The government has never defaulted on the debt, and most financial experts agree that a default would destroy confidence in the financial markets. Financial instruments issued by the Treasury – bills, notes, and bonds – are generally considered to be risk free, and they serve as the bedrock of the financial system.
 
Prioritizing payments – Some budget hawks believe that if the Treasury simply prioritizes government payments, i.e., uses what cash it has to make debt payments before paying other obligations, a debt crisis would be averted. What other obligations would get shorted is not clear – would the government not pay its employees, or delay Social Security or other benefits? There would be winners and losers, and presumably, the Treasury would decide who they are. Rather than calming a debt crisis, prioritizing payments could harm public trust, create disarray, and shake financial market confidence in the ability of the United States to meet its obligations.
 
Shutdown – If, by the beginning of the fiscal year (October 1), appropriations to fund federal programs have not been enacted, a shutdown ensues. A shutdown closes most day-to-day operations of the government, such as the operation of national parks, assistance to small businesses, and research at the National Institutes of Health.
 
A shutdown does not, however, affect roughly two-thirds of the federal budget that includes entitlement and other automatic spending since those programs are financed by permanent laws, not annual appropriations. It also does not shutter activities funded by annual appropriations but are for the protection of property or the safety of human life.
 
Continuing resolution – Even when annual appropriations bills aren’t been enacted by October 1, a shutdown can be averted by a continuing resolution (CR). A CR is simply an appropriations law that provides funding by a formula - typically a funding rate that maintains programs’ current operations – through a certain date. That date can be a few days, weeks, or months after October 1, giving Congress additional time to complete regular appropriations bills. CRs may also include a small number of technical provisions to ensure status quo for affected activities – these provisions are referred to as “anomalies.”
 
A variation to this is a full-year CR, which continues programs through the end of the fiscal year and may include funding levels or provisions that go beyond the status quo if there is consensus to include them. A full-year CR is a last-ditch measure when Congress finds it impossible to finish a regular appropriations bill.
 
Short-term CRs that simply extend the status quo should be noncontroversial. However, opposition to CRs is sometimes used to leverage the threat of a government shutdown to achieve other ends. A clear example of this is when Senator Ted Cruz led efforts to force a shutdown in 2013 with the objective of defunding Obamacare. This was viewed by most of his Senate Republican counterparts as a mistake since a costly (financially and politically) government shutdown ensued without any effect on Obamacare.
 
“Clean” CR or “clean” debt ceiling increase – A short-term, status quo CR as described above would be considered a clean CR since it would exclude controversial provisions. Similarly, a bill that only increases the debt ceiling and does not carry any divisive provision would be considered clean. Treasury Secretary Steven Mnuchin asked Congress to pass a clean hike to the debt limit. OMB Director Mulvaney took the opposite view in an interview with the Washington Examiner, saying  he would “like to see things attached to it that drive certain spending reforms and debt reforms in the future.” 
 
As was the case with Senator Cruz’s shutdown play on Obamacare, Mulvaney’s approach may lead to bigger problems if the result is a debt limit crisis.
 
Budget deal – Some Members of Congress believe work needs to get started on a bipartisan budget agreement that will allow appropriations bills to get done and avoid a shutdown, as well as lift the debt limit and protect the nation’s creditworthiness. However, very little has been done to get those talks started.
 
There were budget deals struck in 2011, 2013, and 2015. One might assume it would be easier now to pass a new budget law with the House, Senate, and White House under control of one party. That is a mistaken assumption.
 
House Republicans are divided on where spending levels should be – while there is consensus on increases for defense, there are broad differences regarding nondefense spending. House and Senate Democrats want to have equal increases in nondefense for every dollar increase in defense. Senate Democrats have a great deal of leverage since the Senate usually needs 60 votes to pass anything, and the Republican hold only 52 seats. And White House involvement in a budget deal is unclear given other distractions.
 
Look forward to a game of chicken with exceptionally high stakes.