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An Overview of the Debt Limit

Thursday, February 6, 2014

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What is the debt limit?

The debt limit is a law that restricts the amount that the federal government is allowed to borrow to finance its obligations. The limit has been raised dozens of times since it was instituted in 1917, including under every president since FDR. In part, the increase in debt (and thus, the debt limit) has been a result of the huge growth of the U.S. economy and substantial expansion in the role of government over the past century. But recent years have seen the federal debt grow by trillions of dollars as a result of large tax cuts, unchecked growth in entitlement programs, unfunded wars, and a large and lingering recession that has depressed tax revenue and increased spending on safety net programs.

Once federal debt hits the limit, the government can continue to pay its bills for a limited time using a combination of cash on hand and extraordinary measures, legal accounting maneuvers that allow Treasury to temporarily borrow past the debt limit (see below). But without another increase in the debt limit, the federal government will begin defaulting on some of its financial obligations on the “X Date,” which BPC defines as the date when extraordinary measures and cash on hand run out.

Where do we stand now?

In previous years, when the debt limit was approached, Congress acted to increase the limit to a specific amount. Recently, when the debt limit has neared, Congress has instead suspended it temporarily. At the end of these suspensions, the debt limit is reinstated at a higher level, incorporating the debt that was accumulated during the suspension.

Under the current suspension, the debt limit will be reinstated at a higher level on February 8, reflecting debt issued since October 17 (when the suspension began) to pay bills and credit government trust funds. The exact level of the new debt limit depends on the amount of deficit spending until February 8. At this time, only a rough projection is possible. BPC estimates that the debt limit will increase by roughly $600 billion in February to about $17.3 trillion. After the debt limit is reinstated, BPC projects that the X Date will be in late February or March. Treasury Secretary Jacob Lew announced a similar projection for the exhaustion of borrowing authority.

What are extraordinary measures?

As the U.S. approaches the debt limit and no longer has authority to borrow additional money through traditional means, the Treasury Secretary will begin to use extraordinary measures. These are legal financial maneuvers – which have been used regularly since their creation in the 1980s – that allow the Treasury to raise additional cash to meet government obligations.

Existing statutes allow the Treasury to change the normal operations of certain government accounts when the debt limit is reached. While there are a handful of extraordinary measures, most of the flexibility that the Treasury has comes from three measures that allow it to reduce the amount of intragovernmental debt. This is debt that is not sold to the public, but rather issued to government funds. The most well-known example of a government fund is the Social Security Trust Fund, which is composed of special Treasury securities. Notably, the Social Security Trust Fund is not part of the extraordinary measures. When intragovernmental debt is reduced using extraordinary measures, it creates room under the debt limit. This room can be used to sell additional debt to the public, which raises cash that is then used to pay bills. After the debt limit is increased, the extraordinary measures are legally required to be unwound. This means that the intragovernmental debt that was reduced has to be restored.

How long will extraordinary measures last?

BPC estimates that extraordinary measures will enable Treasury to continue to make payments in full and on time until some point in late-February or March. While extraordinary measures lasted nearly five months during 2013, they will be much shorter this time around for two key reasons. First, fewer measures will be available in February. During the summer and fall of 2013, Treasury delayed issuing a large amount of debt to the Civil Service Retirement and Disability Fund. In February and early March the measure is much less valuable since there is little debt set to be issued to this fund. Second, the government runs an especially large deficit in February and early March, mainly due to the payment of income tax refunds. Though this year’s tax filing season was delayed a couple of weeks due to the government shutdown, this probably won’t help make extraordinary measures last longer. If anything, delaying filing season likely means that more tax refunds will be paid after February 7, exhausting extraordinary measures more quickly.

So what’s the hold up in raising the debt limit?

The main disagreement in Congress is not over whether we should increase the debt limit, but over how. Some Republicans who oppose raising the limit without other spending reforms attached argue that it creates a “blank check” for the White House to spend. Some of the add-ons that they have suggested include repealing the tax on medical devices that was included in the Affordable Care Act or approving the Keystone XL pipeline. Democrats counter by pointing out that the debt limit does not authorize new spending, but instead allows the financing of existing obligations that Congress and the president have approved. Therefore, they say, the president should not have to give Republicans special concessions in order to increase the debt limit – it should be done in a “clean” bill.

Regardless, not raising the debt limit would risk the full faith and credit of the United States, and we must find a way to do so that can garner bipartisan support.

Alex Gold served as a policy analyst for BPC’s Economic Policy Project.

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