Timely payments of interest and principal of Treasury securities alongside delays in other federal obligations would likely result in legal challenges.
On the one hand, the motivation to pay principal and interest on time to avoid a default on Treasury securities is clear; on the other, lawsuits would probably argue that holders of Treasury securities have no legal standing to be paid before others. It is not clear how such litigation would turn out, in part because the law itself imposes contradictory requirements on the government—requiring it to make payments, honor the debt, and not go above the debt limit, three things that cannot all happen at once.
If the debt limit binds, and the Treasury were to make interest payments, then other outlays will have to be cut by about 40 percent in aggregate. The need for the sharp cut reflects two factors. First, the government is running annual deficits: for fiscal year as a whole, CBO expects 22 cents of every dollar of non-interest outlays to be financed by borrowing.
Second, infusions of cash to the Treasury from tax revenues vary greatly by month, and tax revenues in October and November tend to be fairly muted.
Thus, the required cuts to federal spending when an increase in federal debt is precluded are particularly large during these months. If Treasury wanted to be certain that it always had sufficient cash on hand to cover all interest payments, it might need to cut non-interest spending by more than 40 percent.
The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain. Assuming interest and principal is paid on time, the very short-term effects largely depend on the expectations of financial market participants, businesses, and households. Would the stock market tumble precipitously the first day that a Social Security payment is delayed? Would the U. Would there be a run on money market funds that hold short-term U.
What actions would the Federal Reserve take to stabilize financial markets and the economy more broadly? Much depends on whether investors would be confident that Treasury would continue paying interest on time and on how long they think the impasse will persist.
If people expect the impasse will be short lived and are certain that the Treasury will not default on Treasury securities, it is possible that the initial response could be muted. However, even if the debt limit were raised quickly so that it only was binding for a few days, there would likely be lasting damage.
At the very least, financial markets would likely anticipate such disruptions as we approached the debt limit in the future. In addition, the shock to financial markets and loss of business and household confidence could take time to abate.
Currently, progressive and moderate Democrats are fighting over the size and content of the reconciliation proposal. Few issues in Washington are more misunderstood than the debt ceiling, which once again is the subject of fiscally irresponsible political posturing. Jon Healey is a senior editor on the Utility Journalism team, which tries to help readers solve problems, answer questions and make big decisions about life in and around Los Angeles.
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It also suggested the cap should be replaced with an alternative financial mechanism. Last week, Mr Biden condemned what he called "hypocritical, dangerous and disgraceful" Republican opposition. Mr Biden said it amounts to "playing Russian Roulette with the economy". There are 50 Democrats in the Senate, but in order to pass a measure on the debt ceiling without changing Senate rules, they require at least 10 Republican votes. They also note that, during Mr Biden's predecessor Donald Trump's term, they joined with Republicans to raise the debt ceiling three times.
Senate Republicans have said raising the debt limit is the "sole responsibility" of Democrats because they hold power in the White House and both chambers of Congress. They are frustrated by new spending proposals that Democrats are trying to push through without Republican support, through a procedural tool called "budget reconciliation".
Minority Leader Mitch McConnell tweeted last month that his party "will not facilitate another reckless, partisan taxing and spending spree". Mr McConnell and other party leaders contend that if Democrats can use reconciliation to achieve their economic policy goals, they can also use it to take action on the debt ceiling.
Democrats have expressed concern over using reconciliation, saying it is too complex and time-consuming a route to take. After two attempts to bring up the debt ceiling measure through regular order in the Senate failed, Mr McConnell proposed an agreement last week that Democrats have now accepted.
Some Republicans, including former president Donald Trump, have grumbled that this amounts to "folding to the Democrats", but the temporary measure has now passed through both chambers of Congress. Under the agreement, Congress will still need to vote again in December to avert a default. This change underlined Treasury bonds' role as a means of managing federal finances rather than securities tied to specific projects or wars. In March , President Franklin Roosevelt and Secretary Morgenthau asked Congress to eliminate separate limits on bonds and on other types of debt.
On July 14, the amendment was withdrawn in the Senate after the House had disagreed, thus clearing the way for President Franklin Roosevelt's signature. When enacted on July 20, the law P. This measure gave the Treasury freer rein to manage the federal debt as it saw fit. Thus, the Treasury could issue debt instruments with maturities that would reduce interest costs and minimize financial risks stemming from future interest rate changes.
Although the Treasury was delegated greater independence of action on the eve of the United States' entry into World War II, the debt limit at the time was much closer to total federal debt than it had been at the end of World War I. The Eisenhower Administration had requested an increase in the State of the Union address, but Congress declined to raise the limit until it approved a temporary increase in August Congress declined to raise the limit until the following February, in part to "compel more economy of efficiency, better management of money and manpower in the defense program.
Since then, Congress has enacted 78 separate measures that have altered the limit on federal debt. Some recent increases in the debt limit, however, were large in dollar terms. Since FY, however, debt held by the public has grown due to persistent and substantial budget deficits. Debt held in government accounts also has grown, in large part because Social Security payroll taxes have exceeded payments of beneficiaries. Table 1 shows components of debt in current dollars and as percentages of gross domestic product GDP since FY Table 1.
Source: U. Notes: Amounts held by government accounts and held by the public for FYFY are approximated. In , the Treasury publications began distinguishing holders of debt subject to limit.
The numbers in the table showing this breakdown for FY through FY were calculated by subtracting debts of the Federal Financing Bank, an arm of the Treasury whose debt is subject to a separate limit, from intragovernmental debt. This calculation overestimates debt by billions of dollars because estimates of unamortized discount are unavailable. This adjusted amount was then subtracted from total debt subject to limit for an approximate measure of debt held by the public subject to limit.
Because intragovernmental debt is overestimated, debt held by the public is underestimated. Totals may not sum due to rounding. Figure 1. Table 2. Modifications of the Debt Limit Increased the debt limit temporarily through September 30, Temporarily exempted from limit obligations in an amount equal to the monthly insurance benefits payable under Title II of the Social Security Act in March , the exemption to expire on the earlier of an increase in the limit or March 15, Temporarily exempted from limit a obligations in an amount equal to the monthly insurance benefits payable under Title II of the Social Security Act in March and b certain obligations issued to trust funds and other federal government accounts, both exemptions to expire on the earlier of an increase in the limit or March 30, See discussion in first section of this report.
Debt limit suspended until May 19, Debt limit suspended until February 7, Federal debt held by government accounts has grown steadily since , in part due to increases in Social Security taxes passed following recommendations of the Greenspan Commission, and reflecting the transition of the baby boom generation into its peak earnings years. Debt held by the public, which changes in response to total surpluses or deficits, grew as a share of GDP through the mids.
When large deficits returned and GDP growth slowed in the early s, debt held by the public as a share of GDP again increased. Accumulating debt in government accounts produced most of the pressure on the debt limit that occurred early in As deficits reemerged in FY, increases in debt held by the public added to the pressure on the debt limit in the spring of In the fall of , the Administration recognized that a deteriorating budget outlook and continued growth in debt held by government accounts were likely to lead to the debt limit soon being reached.
As the debt moved closer to and reached the debt limit over the first six months of FY, the Administration asked Congress repeatedly to increase the debt limit, warning of adverse financial consequences were the limit not raised. On April 4, , the Treasury held debt below the limit by invoking its legislatively mandated authority to suspend reinvestment of government securities in the G-Fund of the federal employees' Thrift Savings Plan TSP. This allowed the Treasury to issue new debt and meet the government's obligations.
Once April 15 tax revenues flowed in, the Treasury "made whole" the G-Fund by restoring all of the debt that had not been issued to the TSP over this period and crediting the fund with interest it would have earned on that debt.
The Treasury, for the second time in , used its statutory authority to avoid a default. The Treasury's financing problems, however, would persist without an increase in the debt limit. On May 14, the Treasury asked Congress to raise the debt limit or enact other statutory changes allowing the Treasury to issue new debt. A Treasury news release stated "absent extraordinary actions, the government will exceed the statutory debt ceiling no later than May 16," and that.
The Treasury reduced federal debt held by these government accounts by replacing it with non-interest-bearing, non-debt instruments, which enabled it to issue new debt to meet the government's obligations. The Treasury claimed these extraordinary actions would suffice, at the latest, through June 28, Without a debt limit increase by that date, the Treasury indicated it would need to take other actions to avoid breaching the ceiling.
By June 21, the Treasury had postponed a regular securities auction, but took no other actions. With large payments and other obligations due at the end of June and at the beginning of July, the Treasury stated it would soon exhaust all options to issue debt and fulfill government obligations, putting the government on the verge of a default. During May and June , Congress took steps to increase the debt limit.
The FY supplemental appropriations bill H. However, the Senate's supplemental appropriations bill S. The Senate leadership expressed strong reluctance to include a debt limit increase in the supplemental appropriation bill. Instead, on June 11, the Senate adopted a bill S. The President signed the bill into law on June 28 P. Through the winter and into the spring, the Treasury repeatedly requested that the debt limit be raised to avoid serious financial problems.
By February 20, , the Treasury, as in , used legislatively mandated measures to manage debt holdings of certain government accounts to avoid reaching the debt limit. These actions included the replacement of internally held government debt with non-debt instruments in certain government accounts and not issuing new debt to these accounts.
These actions allowed the Treasury to issue additional debt to the public to acquire the cash needed to pay for the government's commitments or to issue new debt to other federal accounts.
The Senate received the debt-limit legislation on April 11, but did not act until May 23, after receiving further Treasury warnings of imminent default.
The Senate adopted the legislation, after rejecting eight amendments and sent it to the President, who signed it on May The Treasury employed methods used in the previous two years to keep debt under the legal limit. On October 14, Secretary of the Treasury John Snow informed Congress, just before the election recess, that available measures to avoid breaching the debt limit would be exhausted by mid-November.
Although the House passed a budget resolution for FY in the spring of , it did not reach final agreement with the Senate on the measure. Without a budget resolution passed by Congress, no resolution to raise the debt limit could be deemed passed by the House automatically under the Gephardt rule. Consequently, no measure was available to send to the Senate. As the debt approached the limit through the summer and into the fall, no legislation was moved to raise the debt limit.
Without that flexibility, the government would be unable to meet its financial obligations as the amount of debt neared the limit. The legislation cleared the House, but the Senate did not act on it. After the elections, Senator Frist, on November 16, , introduced legislation S. The Senate approved the increase on November 17, The House considered and approved the increase on November The President signed the legislation into law P.
Estimates made at that time anticipated the new limit would be reached between August and December Shortly before the increase in the debt limit, the Treasury delayed a debt auction and informed Congress that it would invoke a "debt limit suspension period" as it had in previous years. The increase in the debt limit in mid-November allowed the Treasury to reschedule the debt auction and cancel, before it began, the "debt limit suspension period.
Debt limit increases in , , and took a less dramatic path than those in President Bush's first term. In , Congress included three reconciliation instructions in the FY budget resolution H. Neither committee reported a bill to raise the debt limit. Under the rule, the resolution was automatically deemed passed by the House and sent to the Senate. Through the end of the first session of the th Congress, the Senate had not considered H.
At the end of December , Secretary of the Treasury Snow wrote Congress that the debt limit would probably be reached in mid-February , although the Treasury could take actions that maintain the debt below its limit until mid-March. He therefore requested an increase in the debt limit. Secretary Snow authorized actions used previously by the Treasury, including declaring a debt issuance suspension period.
As March began, the government was again close to becoming unable to meet its obligations. During the week of March 13 the Senate took up H. On March 16, the Senate passed a debt limit increase after rejecting several amendments.
The President's signature on March 20, , then raised the debt limit P. In mid-May , Congress passed the conference report H. The House's Gephardt rule, triggered by the adoption of the conference report on the budget resolution, resulted in the automatic engrossment of a joint resolution in this case, H.
At the end of July , the Treasury asked Congress to raise the debt limit, stating the limit would be reached in early October Without an increase, the Treasury indicated that it would take steps within its legal authority to avoid exceeding the debt limit.
The Senate then passed the measure on September 27, which the President signed on September 29, P. Financial markets started showing signs of turmoil in mid and experienced a serious crisis in By late , a serious recession had begun, which lasted until The economic slowdown began with a rapid deceleration of housing prices and a rise in interest rate spreads between private lending rates and benchmark Federal Reserve rates, indicating an increasing reluctance of major financial institutions to lend to each other as well as to firms and individuals.
This spurred several major actions to unfreeze credit markets, boost consumption, and increase spending. The recession also reduced federal revenues and increased federal spending, which led to large deficits and a series of debt limit increases.
The federal deficit spending spiked to 9. While federal deficits have been declining since FY, the economic recovery has been weak compared to recoveries following other post-World War II recessions. Economic recession affects the federal deficit in several ways.
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