Apr 3, 2002 4 min read

WASHINGTON (AP) – Treasury Secretary Paul O’Neill on Tuesday put into motion a plan to avert an unprecedented default on the national debt, two weeks after a deadlocked Congress avoided an election-year vote on extending the government’s authority to borrow. The issue could return to haunt the Bush administration and lawmakers later this year if Congress doesn’t raise the borrowing limit.

To dodge a default for now, O’Neill was moving federal retirement funds into a non-interest-bearing account, freeing room for more borrowing.

The juggling of federal retirement accounts, which has been done before in standoffs with Congress over raising the debt limit, will not harm federal employees’ retirement nest eggs, Treasury officials said. The lost interest payments will be made up in coming months.

Without the shifting of funds, Treasury would not have been able to borrow the money it will need in coming weeks to keep the government operating, including making payments on debt that is coming due.

If it had missed those payments, the government would have been technically in default on the $5.95 trillion national debt, something that has never happened in the country’s history.

That would cast a cloud over U.S. securities, now considered the world’s safest investment, and would mean the government would be forced to pay billions of dollars in higher interest payments on the national debt in future years.

O’Neill had warned that the debt ceiling would be hit sometime this week without action from Congress to raise the borrowing limit.

He has repeatedly asked Congress to boost the ceiling by $750 billion.

Given that Treasury can take steps to maneuver around the debt limit and that Congress is sure to eventually raise the ceiling, economists said there was never a real danger that the government would default on its debt and touch off an economic crisis.

The debt limit issue is more about politics than about economics.

Republicans who control the House lack the votes to pass a measure increasing the debt limit because of opposition from GOP conservatives, who are leery that it will lead to more spending, and from nearly all Democrats. To win support, GOP leaders hope to attach the measure to popular legislation paying for the drive against terrorism.

Rather than allowing a quick vote on raising the borrowing cap, many Democrats want to keep the issue alive in the campaign season.

Some Democrats seek to use the issue to drive home their message that the Bush administration’s $1.35 trillion, 10-year tax cut last year was too generous and has pushed the country back into deficit spending.

“The Republican economic plan passed last year has created deficits for each of the next 10 years,” House Democratic leader Dick Gephardt of Missouri said Tuesday.

But Republicans counter that the tax cut was needed to lift the country out of recession. They blame the economic downturn and the war against terrorism for bringing back government deficits.

“The political criticism will not disappear even as the potential debt crisis dissipates,” said Lynn Reaser, chief economist for Banc of America Capital Management. “This event underscores the fundamental differences between Republicans and Democrats over tax cuts and spending – what the right fiscal policy is for the country.”

A flood of income tax payments flowing into Treasury coffers around April 18 will fix the problem temporarily. Those monies will boost funds and should allow the government to operate under the current debt limit until somewhere between mid-June and mid-August, a senior Treasury official estimated.

If Congress doesn’t boost the ceiling before then, lawmakers may have to do battle as they head into election season.

“It’s not a question of if it will happen. It’s a question of when,” said Alice Rivlin, a former Federal Reserve member and director of President Clinton’s budget office, now at the Brookings Institution.

Treasury officials said the shift in the federal retirement accounts, which makes room for the increased borrowing, will begin Thursday and continue to around April 18.

Similar juggling of the retirement accounts was done in 1995 by Robert Rubin, who was treasury secretary in the Clinton administration.

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