It’s Time to Rethink the Debt Limit
Originally published on Jan 5, 2021. Updated on Oct 14, 2021.
For the past several years, the process of extending the U.S. federal debt limit has become a political dance that has repeatedly disrupted markets and jeopardized global economic growth.
It doesn’t have to be this way. For the past hundred years, the federal government has operated with a hard cap on its borrowing authority, requiring specific authorization from Congress to pay the obligations already incurred through tax and spending decisions. Ironically, the debt limit was originally designed to give the Treasury Department more borrowing flexibility, but the current structure has outlived its usefulness. Although the debt limit occasionally sparks a necessary debate among lawmakers on the fiscal health of the federal government, it simultaneously puts the full faith and credit of the United States at risk.
For years, BPC has developed and advanced proposals to promote fiscal responsibility. We have also served a leading role in educating the public on the details of the debt limit, how it operates, and the risks associated with it. This work has led to a clear conclusion: the current debt limit procedure is the wrong tool to promote fiscal responsibility.
With those issues in mind, BPC has crafted a framework for debt limit reform that 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. This multipronged approach would not get rid of the debt limit; instead, it would require that any time the debt limit is extended, a more structured and serious discussion of the federal government’s fiscal priorities takes place.
The proposal contains two key components, discussed here:
Align Debt Limit and Budget Decisions; Establish a Clear Deadline
Reaching the debt limit is merely the symptom of the federal government’s fiscal challenges, not its cause. Aligning action on the debt limit with Congress’ budget decisions would clearly establish the link between the two, a priority supported by the nonpartisan Government Accountability Office. Such a connection would help prevent the risk of defaulting on obligations that have already been approved by Congress.Specifically, the debt limit should be extended when Congress passes a concurrent budget resolution, 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 a budget resolution. To strengthen the policy, this new framework would include the Senate as well and would temporarily suspend the debt limit (which has become common practice) instead of raising it.
BPC’s proposal would also increase transparency by repealing the treasury secretary’s authority to institute extraordinary measures. These accounting maneuvers have led to repeated confusion and produced unnecessary tension between the administration and Congress. Barring these extraordinary measures would allow Congress to reestablish control over the timeline of debt limit extensions by preventing the treasury secretary from artificially extending the federal government’s borrowing authority. Such a change would reduce the possibility of an inadvertent default on federal obligations.
Allow President to Request a Suspension of the Debt Limit with Submission of Debt Reduction Proposal
If Congress fails to pass a budget resolution, the debt limit should not remain subject to partisan gridlock, perpetuating the associated risks. In this case, or if the federal government is within 60 days of reaching its debt limit, the president would be allowed to request an expedited debt limit extension. Senate Majority Leader Mitch McConnell (R-KY) initiated a similar procedure in the past. 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 within 30 days. This portion of the proposal provides the president with a mechanism to ensure that the federal government continues paying its bills in the absence of congressional action, while maintaining congressional authority over those requests.
For the debt limit suspension to take effect under BPC’s proposal, the president’s debt limit request must be accompanied by a debt reduction proposal to Congress. The proposal must reduce debt held by the public as a share of the economy (debt-to-GDP) by a certain percentage at the end of 10 years, with a declining trajectory relative to the baseline thereafter, certified by the Office of Management and Budget.
The president’s proposal would be sent to Congress for consideration and forwarded to the budget committees. If the committees successfully pass the bill, with or without amendment, and it is scored by the Congressional Budget Office as meeting the debt reduction targets above, then it must be brought to the floor for consideration. If the committees fail to pass a bill that is scored by CBO as meeting the debt reduction targets, the president’s original proposal would be scored by CBO and discharged to the floor for consideration if it meets the debt reduction targets. Proposals meeting the debt reduction targets could be brought by members in both the House and the Senate to compete with the president’s proposal. In the Senate, the motion to proceed on the floor would still be subject to filibuster.
The submission of a debt reduction proposal and its subsequent consideration by Congress would force federal policymakers to face the magnitude of the country’s fiscal challenges. Even if such a process does not guarantee action, it would guarantee debate over what policies should be pursued.
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