Policymakers, investors, and concerned Americans of all stripes let out a collective sigh of relief in December, when Congress struck a deal to advance legislation raising the debt limit by $2.5 trillion. The debt limit now stands at a record $31.4 trillion, with the nation’s public debt equal to the size of its economy and growing rapidly.
The deal reached last month by congressional leaders ended the most recent debt limit episode and averted a crisis—for now. Yet the United States will keep accruing debt and will likely face another run-in with the debt limit next year. It will be Groundhog Day once again.
Debt limit brinkmanship has become a recurring pastime for Congress. Seven times in the past decade the U.S. federal government has narrowly avoided a potentially catastrophic default on federal obligations. In 2021 alone, the country twice flirted with the “X Date”—the point at which the United States would no longer be able to meet all of its obligations in full and on time. While brinkmanship may score political points, it also inflicts real harm on the economy and American taxpayers.
In 1979, after a debt limit showdown and technical glitches caused the Treasury Department to delay 4,000 payments on maturing securities totaling an estimated $122 million, short-term interest rates spiked by approximately 60 basis points. The 2011 debt limit episode increased the department’s borrowing costs by hundreds of millions of dollars and led Standard & Poor’s to downgrade the U.S. long-term sovereign credit rating for the first time. In recent episodes, interest rates for four-week Treasury bills that matured around the X Date jumped noticeably.
Approaching the X Date carries financial costs, but crossing it could wreak much worse havoc. Although the Treasury Department may be able to prioritize certain payments—such as interest and principal on the debt—an immediate cash-flow shortage would force the federal government to miss or delay critical obligations. These could include programs that touch nearly every American, from Social Security, Medicare, and Medicaid to military and federal salaries and veterans’ benefits. Even a short-term default on U.S. debt could tank the nation’s credit rating, shock the global financial system, and call into question the U.S. dollar’s status as the world’s reserve currency. A default would also likely batter retirement accounts as well as the broader stock market.
In the face of these potentially disastrous consequences, why does the current process for raising the debt limit persist?
The most common answer—that the debt limit acts as a check on federal borrowing—has proven false. Under both parties, Congress has enacted policies that are driving up deficits, including the 2017 Tax Cuts and Jobs Act, the 2020 Coronavirus Aid, Relief, and Economic Security Act, and the 2021 American Rescue Plan Act. Other budget agreements directly attached an extension of the debt limit to bipartisan increases in defense and domestic agency spending. The purported benefits of the debt limit have not materialized in recent years, while the costs have become clear. To durably protect the full faith and credit of the United States, policymakers should come together and pass legislation to defuse the debt limit before the government nears—or even worse, crosses—the next X Date.
BPC has drafted a framework for debt limit reform to do just that, illustrated in Figure 1. The proposal would align the debt limit with the annual budget process, so that if Congress adopts a concurrent budget resolution, it would send legislation to the president suspending the debt limit through the fiscal year to which the resolution applies. Congress has operated in similar fashion before. In fact, this approach is a modified version of the so-called Gephardt Rule, which for years was used by the House of Representatives to deem an increase in the debt limit when the House passed its budget resolution. If Congress fails to pass an identical budget resolution through both chambers, or if the federal government is within 60 days of reaching its statutory debt limit, the president would be allowed to request an expedited debt limit extension, which would need to be accompanied by a debt reduction proposal sent to Congress. The president’s request would automatically suspend the debt limit through the end of the subsequent fiscal year, subject to a vote of disapproval from Congress. This framework achieves two objectives: first, to take the possibility of a default on the government’s obligations off the table; and second, to provide a vehicle to focus policymakers on the country’s broader fiscal challenges.
The bipartisan Responsible Budgeting Act, recently introduced by Reps. Jodey Arrington (R-TX) and Scott Peters (D-CA), advances these twin goals. The legislation provides two new mechanisms for raising the debt limit. If Congress adopts a concurrent budget resolution that reduces the ratio of debt to gross domestic product (debt-to-GDP ratio) in the 10th year by at least 5 percentage points, the resolution would automatically trigger legislation for the president’s signature that would suspend the debt limit through the end of the following fiscal year. If Congress has not passed a budget resolution meeting that criterion by April 15 of a given year, the president would be able to request a suspension of the debt limit in tandem with a debt reduction proposal to Congress (meeting the same target as specified above). The suspension would go into effect barring a congressional resolution of disapproval, while the debt reduction proposal would jump-start a structured committee process whereby competing proposals could be offered and result in a vote(s) on the floor of both chambers to advance deficit reducing legislation.
The recent bipartisan deal to raise the debt ceiling has temporarily cooled the temperature of the debate surrounding the nation’s borrowing limit. Policymakers should take advantage of this rhetorical disarmament to come together across the aisle and permanently reform the process for raising the debt limit, ending this recurring crisis once and for all and refocusing attention on the country’s underlying fiscal challenge. It’s time to protect America’s long-term creditworthiness and stop the debt limit madness for good.
A summary of the Responsible Budgeting Act can be found here.
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