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Up against the ceiling and over the cliff: end of year economics

by AirTalk®

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US President Barack Obama speaks before Speaker John Boehner (R-OH) Secretary of the Treasury Timothy Geithner (3rdR) and other cabinet members during a meeting on November 16, 2012. AFP/AFP/Getty Images

The United States government will hit its debt limit on December 31 and is set to turn to “extraordinary measures,” says Treasury Secretary Timothy Geithner. Economists predict the $200 billion in overhead funding will last the federal government about two months.

This is not the first time the debt ceiling has posed a threat – this time last year the U.S. approached the limit, coming dangerously close to defaulting on the debt. Special measures were taken to continue paying bills while Congress passed legislation to raise the debt ceiling. Despite advance warnings that the U.S. would approach the debt ceiling again at the end of this year, not much progress has been made. Congress will again work with the limited timeframe allowed by the overhead budget to pay government bills while negotiating a new debt ceiling.

This year though, more unpredictable circumstances related to the fiscal cliff may complicate arrangements for a new debt ceiling. Depending on whether or not a fiscal cliff deal is finalized before the end of the year, Congress could have different amounts of time to spend the $200 billion. If a deal doesn’t pass and the U.S. goes over the fiscal cliff, the immediate tax increase will mean that the government is spending less money, thus allowing longer negotiations for a new debt ceiling. The timeframe for debt ceiling plans could vary depending on what kind of fiscal cliff deal, if any, passes.

Some analysts have called for the end of the limit on government debt, arguing that the frenzy to raise the debt ceiling to avoid defaulting on obligations is harmful to domestic politics and international relations. How should Congress deal with the debt ceiling during fiscal cliff negotiations? What should the government prioritize? Should there be a debt ceiling at all?


Dave Clarke, Financial Services Editor for POLITICO

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