In the 2019 bipartisan budget bill, Congress suspended the federal debt ceiling until July 31, 2021. As of August 1, the federal debt reached the statutory limit or ceiling.
Today’s WatchBlog article examines what it means for the federal debt to hit the cap and the alternative approaches we’ve suggested lawmakers might consider to better manage debt funding and protect the full faith and United States credit.
What is the debt limit?
Congress and the President set a single limit on the amount of debt the Department of the Treasury (Treasury) can issue, creating the debt ceiling. This gives the Treasury the flexibility it needs to manage day-to-day federal debt within this aggregate limit.
However, as we have already pointed out, this approach has 2 significant drawbacks:
- The debt ceiling does not control the amount of debt. Instead, it is an afterthought that limits the ability of the Treasury to borrow to fund decisions already passed by Congress and the President.
- Delays in raising the debt ceiling can disrupt financial markets, increase U.S. borrowing costs, and threaten U.S. faith and credit.
Now that the debt ceiling is reached, what happens next?
There are a number of extraordinary measures the Treasury can use to temporarily manage near-ceiling debt. For example, it may temporarily suspend certain investments in federal employee retirement funds and cash out some of its own investments earlier than normal. But once all extraordinary measures have been exhausted, the Treasury can do little else without congressional action.
We have reported that delays in raising the debt ceiling can disrupt financial markets, even if action is taken in time to pay investors. For example, in 2013, as the Treasury’s extraordinary stock exhaustion date approached, investors feared they would not get paid on time and reported avoiding certain Treasury securities. Investors who bought these Treasuries demanded a higher return to compensate for the increased risk. This ultimately increased costs to US taxpayers.
Figure: Secondary market yields on Treasury bills maturing from end-October to mid-November 2013 (in basis points)
In 2019, 72% of investors we surveyed said they planned to take similar actions, such as avoiding certain Treasuries, to manage future delays in raising the debt ceiling.
If the delays continue and the Treasury’s extraordinary measures are exhausted, it could be forced to delay or even default on payments to investors until the money is available. A default would have devastating effects on the US and global economies as well as the public. This would immediately and dramatically reduce demand for Treasury securities and increase costs. We have repeatedly signaled that the full faith and credit of the United States must be preserved.
Alternative Approaches to National Debt Management
Through interviews with budget and policy experts and an interactive web forum, we identified 3 potential approaches:
- Link action on the debt ceiling to the budget resolution so that borrowing and spending decisions are made at the same time.
- Allow any administration to propose debt ceiling increases, subject to a motion of disapproval by Congress.
- Allow any administration to borrow as necessary to fund laws enacted by Congress and the President.
These alternative approaches would better link debt ceiling decisions to spending and revenue decisions at the time those decisions are made. They would also minimize market disruptions.
Experts have also suggested replacing the debt ceiling with a fiscal rule imposed on spending and revenue decisions. We’ve already testified that Congress might consider this change as part of a larger plan to put the government on a more sustainable fiscal path.