What if the Debt Deal Doesn’t Get Us Through the 2012 Election?

By Matthew Cameron

There aren’t too many things for Democrats to brag about when it comes to the debt deal. The Obama administration is, however, touting the fact that the deal ensures the president will not have to endure another debt ceiling hostage crisis in the middle of his reelection campaign. But how certain are we that the administration is right about this?

The specifics of the debt deal, the federal government’s debt projections and recent discussion of a double-dip recession raise the unsettling possibility that the debt ceiling may be hit sooner than expected. To see why, consider that the debt deal increases the federal government’s borrowing authority by $2.1 trillion from the previous limit of $14.294 trillion. There is the possibility that an additional $300 billion could be tacked onto that if the Super Committee drafts and Congress subsequently passes legislation that reduces the deficit by $1.5 trillion, rather than settling for the $1.2 trillion in deficit reduction that is automatically generated through the trigger mechanism. That is hardly guaranteed, though, so the operating assumption has to be that the government will be able to borrow up to $16.394 trillion before it has to request another debt ceiling hike.

Yet the OMB estimated in its Fiscal Year 2012 budget proposal that the federal debt subject to the statuary limit will be $16.638 trillion at the end of 2012 (Excel). That is $244 billion greater than the borrowing authority guaranteed to the federal government under the debt deal. It’s possible that the OMB’s debt projection has since been revised downward, but the change isn’t likely to be large enough to give the government much breathing room if its financial circumstances change.

Which gets to the most discomforting possibility — that a double-dip recession could drastically reduce GDP growth relative to the OMB’s projections. The agency offers a “rule of thumb” for what to expect in such circumstances. If GDP growth underperforms by 1 percent in 2011 but then catches up to expected growth in 2012, it will increase the deficit by $51.3 billion during those two years. If GDP fails to rebound to projected levels in 2012, then the budget deficit would rise by $61.2 billion. If GDP growth remained 1 percent below projections for both 2011 and 2012, however, it would drive up the deficit by $63.1 billion — and that last figure is obtained while holding unemployment constant, meaning that increased outlays on food stamps, unemployment insurance and other safety net programs aren’t taken into account.

The agency’s debt projections are predicated on the assumption that GDP will grow by 2.7 percent in 2011 and 3.6 percent in 2012 (PDF). Given that annualized growth was only .4 and 1.3 percent in the first and second quarters, respectively, the OMB’s projection for 2011 now seems entirely unrealistic. The projection for 2012 could be at risk, as well, if the economy enters a full-blown recession. After all, Michael Feroli of JPMorgan Chase already is predicting that growth will be a mere 2 percent during the first half of 2012. These types of growth figures would be devastating to the federal budget and could force the government to borrow a lot more money during the next two years than it is presently anticipating.