'Fiscal cliff' meets debt ceiling: Should Washington tackle both now?

How might Americans know when negotiations between President Obama and congressional leaders are getting serious on the "fiscal cliff"?

“When they start using the words ‘debt limit,’ ” says J.D. Foster, a senior fellow at the conservative Heritage Foundation.

How to back the nation off the cliff – shorthand for the more than $600 billion in higher taxes and lower government spending set to hit the American economy beginning Jan. 1 – is all the buzz in Washington. But immediately behind that lurks the need for Washington to confront, again, what to do about bumping up against the debt ceiling, a matter that is vital to the actual functioning of America’s government.

A dive off the fiscal cliff (meaning no action is taken to avert the tax hikes and big spending cuts) means the US economy would enter a recession in 2013 and the unemployment rate would rise to more than 9 percent, according to the forecast of the nonpartisan Congressional Budget Office (CBO). No one in Washington wants to put the country through that. But America has survived recessions.

What the nation has not endured before are the effects of congressional refusal to raise the national debt ceiling, such as a potential default on its debt obligations, a blow to its credit rating, and a crippling of government operations.

“In fact, you can go over the fiscal cliff,” says Mr. Foster. But “you cannot continue the federal government without appropriations, [and] you cannot continue to run a deficit without a debt limit. All the fiscal cliff stuff is an almost-must-pass [package of legislation]. The debt limit is a must-pass.”

The debt ceiling limits how much money the federal government can borrow to pay debts it has already accrued. Congress raised it by $2.4 trillion in the summer of 2011 to $16.4 trillion – just enough to cover the government's obligations until after the November election. It took that action after protracted negotiations led by House Republicans and the White House that sent financial markets down and approval ratings of Congress and President Obama plummeting.  

The federal government is expected to run out of maneuvering room on the debt ceiling sometime between February and April.  

House Speaker John Boehner (R) had vowed previously to boost the debt limit only by trading $1 in debt increases for $1 in government spending cuts. At a time when Congress is trying to offset at least some part of the $109 billion in automatic spending reductions in 2013 known as the sequester, finding more government cuts to match another debt-ceiling increase would be a tall order.

That means the negotiations over avoiding the fiscal cliff should loop in planning for raising the debt ceiling, many in Washington argue.

“The smart thing to do would be to, yes, embed the debt ceiling in whatever deal they do, because they are related,” says Bruce Josten, executive vice president for government affairs at the US Chamber of Commerce.

Democrats have a simple answer to this conundrum: Raise the debt ceiling with minimum political wrangling.

“I would think the debt ceiling has to be part of any short-term discussion,” says Rep. Chris Van Hollen of Maryland, top Democrat on the House Budget Committee. “The best way to resolve it in the most responsible way ... is not to play politics with the debt ceiling. We saw what kind of disruption, chaos, that caused last summer.”

That’s going to be tricky for congressional Republicans, who see the debt limit as a point of leverage in their crusade to curtail government spending.

“I don’t believe that the House is going to go along with a big increase in the debt limit if they haven’t made very significant progress on deficit reduction prior to that,” says Mr. Foster of the Heritage Foundation.

Not everyone agrees that Congress should deal with the debt ceiling and the fiscal cliff together. Former CBO Director Douglas Holtz-Eakin says he hopes negotiators keep them separate, fearing that aiming for an accord on both issues “is a recipe for attempting to get too much done” and potentially achieving neither.

The stakes are high, whichever route the negotiations take. Honeywell CEO Dave Cote likened the situation of the debt ceiling and the fiscal cliff to Washington “playing with nitroglycerin.”

“It’s important to recognize that the stakes have gone up across the board when you combine the debt ceiling with the fiscal cliff,” says Mr. Cote, a leading proponent of a “grand bargain” to address America’s long-term debt and deficit problem, including entitlement and tax reform.

If Congress and Mr. Obama make only limited progress on the fiscal cliff, the forthcoming debt-ceiling fight could be even grislier.

“This is going to come up real fast,” Foster warns. “If we hit that debt limit with just having kicked the can down the road [on the fiscal cliff] in some fashion, that debt-limit fight is going to make the last one look like a cakewalk.”