What to do with the Federal Debt Limit? Five Ideas

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Thursday, February 6, 2014
The United States is one of the few nations that still requires legislative approval of its debt limit increase

Samantha Green contributed to this post.

Five possible reforms to the present congressional process for raising the nation’s statutory debt limit emerged from a recent panel of market and economic experts hosted by the Bipartisan Policy Center (BPC).

As the debt limit melodrama last year demonstrated, congressional involvement in increasing the limit can have profound impact on financial markets, the economy and the legislative process.

How can the process be made smoother and less disruptive?

The following are five ideas discussed by the panelists:

  • Repeal the debt limit and strengthen reporting and transparency, reforms that Australia undertook in 2013: Australia repealed its debt limit when politicians could not agree to a new level for the limit, which had originally been instated in 2008. In repealing the statute, the agreement increased the level of detail about debt to be included in major budget reports and also required an additional report to be issued at any time that there is a significant increase (more than $50 billion Australian) to the debt;
  • Adopt the mechanism that has already been used twice by Congress over the last two years: Under this scenario the president can unilaterally suspend the debt limit, subject to congressional disapproval, which could then, in turn, be vetoed by the president;
  • Restore to the House and expand to the Senate the Gephardt Rule: This House Rule was used to automatically approve increases in the debt limit between 1979 and 2010 without an actual vote on the matter. The rule stipulated that the House had passed an increase in the statutory debt limit upon approval of a Conference Report on the Congressional Budget Resolution for a given fiscal year;
  • Insert consideration of the debt limit into the annual congressional appropriations process: Under current rules, legislation that increases the debt limit is entirely separate from the appropriations process. The panelists discussed somehow combining these two processes so that the appropriations process also resulted in legislation on the debt limit. A disadvantage that this reform could entail would be that in years when the normal budget process is not followed (e.g., most recent ones), a separate debt limit bill would still need to be considered;
  • Repeal the present congressional process of voting on the debt limit increase and instead adopt fundamental budget process reforms: The current budget process addresses only “discretionary” spending, which makes up about one-third of the federal budget and must be renewed annually.1 Many contend that the only mechanism currently forcing Congress to consider the entirety of the federal budget is the debt limit. Several panelists suggested incorporating mandatory spending and/or revenues into the annual budget process so that Congress would regularly review the budget as a whole rather than just a small slice.

The United States is one of the few nations that still requires legislative approval of its debt limit increase. Since the U.S. dollar is the world’s reserve currency, and because United States Treasury debt issuance forms the basis for interest rates throughout the developed world, panelists noted that the uncertainty surrounding the debt limit had led to increased public and private costs. Panelists warned that such uncertainty was especially troubling when other nations are just now beginning to recover from the Great Recession.

According to Paul Sheard, Chief Global Economist and Head of Global Economics and Research at Standard & Poor's Ratings Services: 

This is not just an issue about domestic U.S. fiscal policy. U.S. treasury securities stand as essentially the linchpin of the global financial system. They are the penultimate, safe – hopefully safe, safe if they don’t default – risk-free liquid asset that’s embedded in the whole plumbing of not just the U.S. financial system, but the global financial system … The [debt limit situation] appears to many market participants … as an unnecessary issue which then layers potential noise and cost into the system.

When addressing whether the “drama” surrounding the debt ceiling was the only way to get widespread public attention about the national debt, Tony Fratto, former Assistant Secretary of Treasury for Public Affairs, said, it’s “a high cost for drama to risk the full faith and credit of the U.S. government to have that conversation.”

Conversely, Lawrence B. Lindsey, former Director of the National Economic Council and former Assistant to President George W. Bush on Economic Policy, argued in favor of retaining the current congressional involvement with the debt ceiling because it provides a way in which Congress has to take an affirmative step to continue government spending. He deemed the debt limit an “inelegant” way to achieve such discussion, “but it’s the only thing we have left.”

Panelists included:

  • Amanda Sayegh, Economic Minister-Counsellor to the Australian government;
  • Lawrence Lindsey, former Director of the National Economic Council for President George W. Bush;
  • Rudolph Penner, former Director of the Congressional Budget Office;
  • Paul Sheard, Chieft Global Economist, Standard and Poor’s’ Rating Services;
  • Tony Fratto, former White House and Treasury official during President Bush’s Administration.

1 “Discretionary spending” is the portion of government spending that Congress must approve (appropriate) each year. It makes up about one-third of the federal budget. Discretionary spending funds many programs including almost the entire defense budget, scientific research, head start, the FBI, and much more.

Other programs, so-called “mandatory spending,” are automatically funded every year without congressional action. Mandatory spending currently makes up about 60 percent of the federal budget and funds Medicare, Medicaid, and Social Security among other programs.

The final portion of the federal budget—around six percent—is interest paid on public debt.

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