Lately, some commentators have made much noise about the federal debt having decreased since the recent presidential inauguration, while their opponents have rushed to debunk this claim by suggesting that this was a temporary effect of lumpiness in the federal government’s cash flows and that the overall trend in still higher. While both these positions may be technically true as stated, they are both misleading. For while the federal debt has decreased slightly since January 20, the deficit continues its inexorable rise, although variations in federal income are not the main reason for the non-increase. The apparent contradictions are easy to understand, if one cares to look at the question dispassionately. This commentary will do its best.
Recall that the Treasury maintains a checking account at the Federal Reserve which it uses to pay for its ordinary operations. Ever since most recent debt ceiling “crisis” in late 2015 when the checking account fell perilously close to empty, the previous administration had maintained an unusually large balance–generally around $300-400 billion. When Obama left office, the account was sitting at the high end of this range, $382 billion to be exact. However, at the end of February, the balance was only $189 billion; during that same period, the debt was flat at $19.96 trillion. Taking these two numbers together, we can see that the new administration’s deficit in its first forty days was $200 billion (which is to be expected in February, since income tax refunds are usually at their height during that month). Rather than increasing the debt, the Treasury instead chose to draw down the checking account. Needless to say, this method of operation is unsustainable—sooner or later debt will need to be sold to replenish the checking account.
It is understandable that the new administration did not wish to begin its term in office fending off stories about the debt exceeding $20 trillion. However, the fiscal realities of continued deficits and debt increases cannot be postponed indefinitely. As an added twist, the latest iteration of the debt ceiling dance will begin anew on March 16, when the suspension of the ceiling agreed to in 2015 will end and the new limit will be set at the level reached at the close of business on that day. The Treasury has a well-honed playbook of temporary workarounds which include delaying payments to civil service pension and other trust funds, and with a cash flow surplus expected in April (when both final returns for 2016 and estimated payments for 2017 are due), the issuance of new debt and the corresponding need to take immediate action can be delayed until the summer. However, increasing the debt ceiling cannot proceed without legislative assent and Congressional negotiations may prove difficult. Usually the Treasury tries to build up a cash cushion in its checking account in advance of the bargaining in order to maintain some flexibility if Congress delays kicking the can down the road. Either this administration has something different in mind or it has not thought through the implications of drawing down the checking account; this commentary finds it difficult to make an informed choice between these alternatives.
Whatever the reason, this month the Treasury continued to draw the cash balance down rather than increasing the debt—as of March 6 the checking account was down to $94 billion. Perhaps the new regime’s desire to assert that it has not increased the national debt for a few months outweighs practical consideration of fiscal reality.
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