Risking the Recovery: Debt Limit Uncertainty Returns

Mar 16, 2015

Today, the statutory debt limit will be reinstated, which will prevent the Treasury Department from borrowing additional funds. The debt limit has been suspended since February 2014. To continue paying the federal government’s obligations going forward, once again, the Treasury Department will have to employ “extraordinary measures” that enable it to continue borrowing for a limited amount of time.

According to PGPF estimates, those extraordinary measures will be exhausted in October or November of 2015. At that point, if the debt limit is not raised or suspended, the Treasury Department would be forced to rely solely on incoming cash flows to pay obligations. Such a scenario would push the federal government into a default on some of its obligations, a scenario that would have devastating effects on the economy.


If lawmakers do not agree to raise or suspend the debt limit before the extraordinary measures are exhausted, there would be severe consequences for both the federal government and the economy. With spending limited to its incoming revenue, the federal government would be forced to delay payments to employees, contracts would be violated, and payments to beneficiaries of government programs (including Social Security and Medicare) could be threatened. Although the Treasury Department would likely continue making timely principal and interest payments on the public debt, worries about the government’s creditworthiness would be likely to cause interest rates to rise and increase the government’s cost of borrowing.

A federal default of this nature would have serious economic consequences. A 2013 study by Macroeconomic Advisers and funded by PGPF analyzed the economic effects of fiscal brinksmanship during the fiscal cliff episode. The study found that even a brief debt limit impasse at that time would push the economy back into recession; an impasse lasting two months could have led to a prolonged economic downturn and eliminated approximately 3 million jobs.1


No — raising the debt limit does not authorize new spending. Rather, raising the debt limit simply enables the Treasury Department to pay commitments that the government has already incurred as the result of past decisions by elected officials. In order to control actual spending, lawmakers must change the laws that authorize spending in the first place.


The debt limit has been raised frequently in the past — more than 80 times since 1960.

Debt subject to limit and the statutory limit on federal debt since 1965. | SOURCE: Office of Management and Budget, Budget of the United States Government, Fiscal Year 2016, February 2015. Compiled by PGPF.

The debt limit has been raised by many presidents and Congresses from both parties.

The debt limit has been raised or suspended 82 times since 1959.


Even if default is avoided, fiscal brinksmanship surrounding the debt limit has negative consequences. The threat of default puts into question America’s willingness to honor its commitments. Not only does the threat of default harm the image of our country’s creditworthiness, it also has an impact on our economy. The 2013 Macroeconomic Advisers’ report found that the uncertainty created by fiscal brinksmanship from 2010 to 2013 cost the economy 900,000 jobs. Fiscal uncertainty also hurts the federal budget. The U.S. Government Accountability Office (GAO) estimated that delays in raising the debt limit in 2011 increased the government’s borrowing costs by $1.3 billion in that fiscal year.2


While brinksmanship is a poor way to conduct fiscal policymaking, the debt ceiling is a reminder of the continuing structural imbalances in our federal budget. Since the suspension of the debt ceiling in February 2014, the debt has increased by approximately $900 billion and there have been no meaningful reforms to our unsustainable long-term fiscal path. Stabilizing the debt over the long term is a key part of any sound fiscal policy and viable economic strategy for America. Unless we confront these budgetary challenges and close the structural imbalance between spending and revenues, federal debt will climb to unsustainable levels and put America’s economy and future prosperity at risk.

Addressing our long-term fiscal challenges is critical for ensuring that America has adequate resources for investing in our future, protecting critically important programs, and creating robust economic growth and opportunity for future generations. Governing by crisis, engaging in fiscal brinksmanship, and threatening our nation’s creditworthiness are not effective means of addressing our fiscal situation and will make matters worse to the extent that they hurt the economy. Instead, Congress should use the formal budget process as a positive means to develop effective fiscal reforms that address our fiscal challenges and improve our economy for the long term.

1Macroeconomic Advisers, LLC, The Cost of Crisis-Driven Fiscal Policy, October 2013. (Back to citation)

2Government Accountability Office, Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs, July 2012. (Back to citation)

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