This piece was created in collaboration with Chatham House. Marianne Schneider-Petsinger is the U.S. geoeconomics fellow at Chatham House's U.S. and the Americas Programme. The views expressed are the author's own.
Raising the federal government’s borrowing limit will not cause much drama this time around. But the next battles are already brewing.
The debt ceiling is back. As of March 16, the U.S. Treasury has reached its legal borrowing limit; the most recent suspension of the debt ceiling has expired. Less than two months into Trump’s presidency, addressing the debt limit is an early test of his ability to get a fiscal deal with the Republican-controlled Congress. However, unlike in 2011 and 2013, when political brinkmanship between Democrats and Republicans led to fears of default, reaching a debt ceiling agreement will be easier -- at least for now.
Initial signs from the Trump administration show that they are not willing to play with fire on the debt ceiling. Treasury Secretary Steven Mnuchin stressed during his confirmation hearing and in a recent letter to Congress that honoring the U.S. debt is a “critical commitment” and urged lawmakers to “raise the debt limit at the first opportunity.” Mick Mulvaney, the director of the Office of Management and Budget, holds a different philosophy but has sounded less dogmatic since joining the Trump administration. Though he is considered a fiscal hawk and never voted to raise the debt ceiling when he served in Congress, Mulvaney said during his recent confirmation hearing that he would not recommend President Trump “negotiate or govern by crisis.”
In addition, although Republicans won’t abandon fiscal conservatism, they will be reluctant to prompt a showdown in the first year of Trump’s presidency. While in the past Republicans have often only agreed to raise the debt ceiling in return for spending cuts, this time around they might not insist on this. Many trust that Trump’s economic policies will lead to economic growth of 3-4 percent, and they see this as the best chance of balancing the budget and bringing the debt trajectory under control.
“Extraordinary measures” that the treasury secretary can take, such as temporarily suspending payments to federal retirement funds, should buy enough time for policymakers to agree to raise the ceiling before fall -- when default becomes imminent according to the Congressional Budget Office.
But that doesn’t mean this issue is going away for Trump -- a battle is looming for the next time the debt ceiling comes around. By then, it will be clear that Trump’s unrealistic growth expectations, coupled with plans for tax cuts and more infrastructure and defense spending, will actually balloon the deficit and debt. In that scenario, the fiscal hawks in the Republican Party will not stand by silently. The House Freedom Caucus, a group of about 30-40 fiscally conservative representatives, has enough voting strength to deny a House majority based on party lines for raising the debt limit.
This internal fight might force Trump to cut back on some of his spending initiatives. Also, while he has so far insisted that he does not want to cut Social Security and Medicare, he might have to reform them down the road in order to stave off an intraparty clash. Without addressing the two biggest sources of government spending, another debt ceiling standoff is brewing -- with all the attendant consequences for the U.S. and global economies.
