Dec 20, 2017

On December 9, the suspension of the statutory debt limit expired and the limit was reinstated at the level of debt outstanding on December 8. Beginning at that point, the Treasury Department was no longer able to borrow additional funds under standard operating procedures; instead, it began to employ “extraordinary measures” such as suspending the daily reinvestment of Treasury securities held by the Thrift Savings Plan’s G Fund (part of the retirement system for federal employees). That and other extraordinary measures will enable the Treasury to manage the government’s finances for a few months.

According to the Congressional Budget Office (CBO), the extraordinary measures will likely be exhausted in late March or early April 2018. If the debt limit is not raised or suspended before the date of exhaustion, the Treasury Department would be forced to rely solely on incoming cash flows to pay obligations, thereby risking default or delays in payments.

What Are the Potential Consequences of Not Raising the Debt Limit?

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

A default of that nature would have serious economic consequences. A study by Macroeconomic Advisers and funded by PGPF analyzed the economic effects of fiscal brinksmanship during the “fiscal cliff” episode that was resolved on January 2, 2013. The study found that if the debt limit had caused even a brief restriction on borrowing at that time, the economy could have been pushed back into recession. A disruption in borrowing lasting two months could have led to a prolonged economic downturn and eliminated approximately 3 million jobs.1

Does the Debt Limit Control Government Spending?

No — raising the debt limit does not authorize new spending. Rather, raising the debt limit simply enables the Treasury Department to fund commitments that the government has already incurred under previous decisions by elected officials. To control actual spending, lawmakers must change the laws that provide funding in the first place.

What Is the History of the Debt Limit?

The debt limit has been raised frequently in the past — 85 times since the beginning of 1959.


The statutory debt limit since 1977


The debt limit has been raised by many Presidents and Congresses — controlled by both Democrats and Republicans.


The debt limit has been raised or suspended 85 times since 1959


What Are the Effects of These Fiscal Battles on the Economy?

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 that harm the image of our country’s creditworthiness, it also has an impact on our economy. The Macroeconomic Advisers’ report found that the uncertainty created by fiscal brinksmanship from 2010 to 2013 cost the economy 900,000 jobs. Fiscal uncertainty also affects the federal budget. The U.S. Government Accountability Office 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

Conclusion

Stabilizing the debt is an essential part of any sound fiscal policy and economic strategy for America. Unless we make the hard decisions to 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 fiscal challenges is critical to ensure that America has adequate resources for investing in our future, protecting critically important programs, and creating robust economic growth and opportunity for coming generations.

Governing by crisis, engaging in fiscal brinksmanship, and threatening our nation’s creditworthiness are not effective means of addressing our fiscal situation. They will only make matters worse to the extent that they harm America’s economy and creditworthiness. Instead, Congress should use the formal budget process as an opportunity to develop effective reforms that address our fiscal challenges and improve our economic outlook.


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

2 Government 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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