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On August 1, 2021, the statutory debt limit was reinstated after having been suspended for two years. As a result, the Treasury Department can no longer borrow additional funds under standard operating procedures. Instead, it will be forced to employ “extraordinary measures” such as suspending portions of 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 short period of time.
According to the Congressional Budget Office, the Treasury will be able to fully fund the government until October or November by using extraordinary measures to create space for borrowing. If the debt limit is not raised or suspended before the date of exhaustion, though, the Treasury Department would be forced to rely solely on incoming cash flows to pay obligations, thereby risking default or delays in payments.
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 revenues, 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.
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.
The debt limit has been raised frequently in the past — 87 times since the beginning of 1959.
The debt limit has been raised by many Presidents and Congresses—controlled by both Democrats and Republicans.
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 effect on the 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; a subsequent report identified costs of $38 million to $70 million resulting from the debt limit impasse in 2013.
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. 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.