The newly sworn-in Treasury Secretary is about to do something extraordinary. But those actions will appear almost ordinary, given recent trends on dealing with the debt limit.
In what has become a regular ritual, the government will have to act to avoid fiscal chaos when it reaches the federal debt limit in just a few days. The debt limit, which restricts the total amount that the U.S. government can borrow, will be reinstated on March 16 at around $20 trillion.
When that happens, Treasury will need to institute so-called “extraordinary measures” (which have been used consistently since 2011) to allow for limited additional borrowing. These measures temporarily lower or eliminate payments to certain government accounts to make room under the debt limit for Treasury to continue to fund the rest of the government. Absent action by Congress, once Treasury exhausts these measures and its available cash, the federal government would no longer be able to pay all of its bills in full and on time. The Bipartisan Policy Center calls that point the “X Date.”
No one can predict the exact day Treasury would run out of money. Our estimates show sometime in October or November. But this “X Date” should not be viewed like a term paper deadline, where completing it at the last minute falls under the “no harm, no foul” excuse — procrastination here has real consequences.
There are costs to operating under extraordinary measures and even nearing the “X Date.” First, it is inefficient government at its worst, with Treasury staff spending time needlessly performing these accounting maneuvers. Debt limit impasses also increase borrowing costs. The U.S. Government Accountability Office (GAO) estimates that the government lost between $38 million to $70 million in 2013 alone, due to the debt limit standoff that year. In 2011, Standard and Poor’s downgraded the credit rating of the United States, potentially producing additional long-term interest costs for the federal government. Far from dealing with the long-term debt problem, recent debt limit brinkmanship has often made it worse.
The risks associated with crossing the “X Date” are more severe. Some have suggested that a technical default would be avoided if Treasury prioritized bondholders, though others believe that the market reaction to a U.S. failure to meet any financial obligation would be sharp and swift. At minimum, Treasury would be forced to cut or delay payments owed to individuals and organizations — everything from tax refunds, to healthcare provider reimbursements, to defense vendor payments. Under darker scenarios, the financial fallout could cause a nationwide recession or worse. In 2011, former Federal Reserve Chairman Ben Bernanke warned that a government default could cause a financial crisis so large it would end the economic recovery.
The fact that the estimated “X-Date” is months away should not lead to a false sense of security. Even nearing that point is risky, because projections are inherently uncertain. Due to the fluctuation in Treasury’s daily cash flows and particular volatility in this year’s federal receipts, the “X Date” could arrive unexpectedly early (or late).
Despite the concerns detailed above, the debt limit does bring attention to a real issue: the size of federal debt. Within 20 years, Congressional Budget Office projections show debt growing to a historic high relative to the size of the economy. Our long-term debt challenge is driven primarily by increased spending on entitlement programs and a shortage of revenue to fund them. Such trends threaten to squeeze out other national priorities, such as defense and infrastructure investment, and also threaten to slow economic growth.
Luckily, the choice for Congress is not limited to arbitrarily raising the debt limit or risking economic collapse from default. The GAO and others have offered options for policymakers to consider that would place the fiscal policy focus squarely on spending and revenue decisions. For example, Congress could link votes on raising the debt limit to regular parts of the budget process, such as congressional budget resolutions. Options like this would encourage Congress to debate the merits of increased debt at the same time that spending and revenue decisions are made. Critically, a reformed system could minimize risk to the full faith and credit of the United States.
Congress has a lot on its plate, but the debt limit should not get lost in the shuffle. There are real costs and consequences to making extraordinary measures the ordinary way we run the government.
Shai Akabas is director of fiscal policy at the Bipartisan Policy Center. He assisted Jerome Powell, who now sits on the Board of Governors of the Federal Reserve System, in his work on the federal debt limit in 2011. He was on the staff of the Domenici-Rivlin Debt Reduction Task Force in 2010.
Timothy Shaw is a senior policy analyst at the Bipartisan Policy Center. He previously served as a senior analyst at the U.S. Government Accountability Office, where he prepared reports for Congress in a number of areas including long-term fiscal policy and the federal budget process.
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