World and Nation

Debt ceiling complicates fiscal cliff for United States

WASHINGTON — Come January, the United States will not only face immense tax increases and spending cuts, should Congress fail to act. It will also run out of room to finance its large running deficits.

The Treasury Department expects the country to hit its debt ceiling, a legal limit on the amount the government is allowed borrow that is about $16.4 trillion, close to the end of the year. That would give Congress only a matter of weeks to raise the ceiling again before sending financial markets into a panic.

Congressional leaders have made clear that the debt ceiling will be part of the intense negotiations over the so-called fiscal cliff, with many members unwilling to raise the ceiling without a broader deal. That has raised financial analysts’ worries of a financial market panic over the ceiling in addition to the slow bleed of the tax increases and spending cuts.

Congressional action is required to raise the debt limit. Otherwise the government’s expenses will overwhelm its revenues, putting the administration in the position of choosing which bills to pay. It might stop paying soldiers, for instance, or sending Social Security payments.

In 2011, congressional Republicans would not raise the debt ceiling without a broader agreement to cut the country’s deficit and set it on a better fiscal path. The impasse over finding spending cuts and tax increases to do that led to the creation of the spending cuts on Jan. 1, the same time the Bush-era tax cuts were set to expire.

The threat that the country might not pay all its bills caused a slump in financial markets and led in August 2011 to the first downgrade of the nation’s credit rating. It left broader economic scars, too. Many economists contend it hurt economic growth and jobs.

A July report by the Government Accountability Office found that the delay in raising the debt limit increased the country’s borrowing costs by about $1.3 billion in the 2011 fiscal year.

“However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011,” the report noted, adding that the debt-limit fight diverted Treasury’s time and resources from other priorities.

This year, Congress will have time to negotiate a broader debt deal before needing to raise the ceiling, even if negotiations spill into January. But the ceiling will be a playing card in the complicated political game that the White House, Senate Democrats and congressional Republicans are playing.