While raising the debt limit may seem out of sync with fiscal restraint, failing to raise the limit to fund existing commitments will actually result in more government spending. As the clock keeps ticking, it is imperative that members of Congress act sooner rather than later on raising our national debt limit. The impact on America’s economy and the impact on small businesses and families won’t wait until zero hour.
Each time the debt ceiling is approached, the Treasury must take extraordinary measures to keep from breaching the limit. One significant step requires disrupting the regular and predictable auction schedule of U.S. Treasury bonds, bills and notes and the reassignment of manpower to debt issues. The GAO estimated that a seven day delay in the announcement for the auction of a two year Treasury note in 2002 resulted in additional annual interest costs to the taxpayer of $19 million. And this was only one instance. Auctions have been delayed or postponed 18 times since 1996 because of debt ceiling issues.
In addition to disruptions to the auction calendar, the GAO estimated that the general uncertainty caused by the debt ceiling debate added $78 million in additional borrowing costs to all 3-month Treasury bills issued as a result of the debt limit. That is millions of dollars out of taxpayers' pockets.
States and localities depend on the issuance of State and Local Government Series (SLGS) securities, special, non-marketable Treasury securities, for certain financing transactions. As has already been reported, when the government’s debt managers face debt ceiling constraints, ceasing the issuance of new SLGS is often one of the first extraordinary steps Treasury takes to maintain flexibility in the issuance of regular, marketable securities.
On May 6th, Treasury announced that it has suspended issuing SLGS as the first step of their extraordinary measures. This is already putting fiscal pressure on states and localities, making it difficult to refinance their own debt and hampering funding to support road repairs, bridge construction and school programs. Continued delay of raising the debt ceiling is already having a negative impact on American cities, towns and school districts.
Businesses large and small are also in the process of altering their short- and medium-term planning strategies to factor in the likely restriction of credit because of debt ceiling issues. If the debt ceiling is not raised, interest rates would spike dramatically. Higher borrowing costs for businesses means less capital can be put toward research and development, business expansion and job creation. The prospect of paying high interest rates will force businesses to halt expansion plans, slowing their hiring because future capital will have to be dedicated to paying interest payments, instead of hiring workers. It also means that American families will face higher interest rates on car loans, home mortgages and student loans.
Abandoning our responsibility to honor our existing debts voluntarily when we have the means to pay will have long-term consequences counterintuitive to achieving balanced budgets and meaningful debt reduction. The American economy and the American people simply can’t afford for our nation to default. Congress must act now.
Tim Ryan is the CEO of the Securities Industry and Financial Markets Association, which provides the financial industry with representation to policymakers, regulators, media, industry participants, and the general public.