BEYOND THE NUMBERS
With the federal government on course to hit the legal debt limit this year, a new Government Accountability Office (GAO) study shows that the limit is harmful. That’s consistent with our view, briefly here and in detail here, that policymakers should repeal the debt limit (or at least let it rise automatically as necessary) and enforce fiscal discipline more directly, by raising revenues and reducing spending. After all, the debt limit makes it hard for the nation to pay its bills after incurring them; it doesn’t stop the nation from incurring them in the first place.
GAO found that in October 2013, when the Treasury was close to breaching the debt limit, “investors reported taking the unprecedented action of systematically avoiding certain Treasury securities.” That cost the Treasury “from roughly $38 million to more than $70 million” in higher interest costs — amounting to, in essence, nothing more than a waste of taxpayers’ money.
GAO also interviewed budget and policy experts (including some of us at CBPP) and identified three alternative ways to handle the debt limit:
- Let the debt limit rise automatically or at a minimum, force an immediate vote on a “clean” debt limit increase — that is, one that’s not attached to any other legislative proposals — whenever Congress adopts a new budget resolution. Congress could no longer pass a budget plan but not set a debt limit consistent with it.
- Allow the President to raise the debt limit as needed to cover bills incurred under existing budget law, while giving Congress a special, fast-track procedure to pass a law disapproving any such action.
- Allow the Treasury to borrow as needed to cover bills incurred under existing budget law.
Any of these alternatives is better than the current approach, in which Congress enacts spending and tax law but doesn’t have to permit the borrowing needed to cover the nation’s resulting bills — and so raises the risks of what could be a catastrophic default.
GAO’s conclusions mirror those of a distinguished and bipartisan group of top economists who overwhelmingly agreed in 2013, “Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.”
And, as the Financial Times opined a few years ago, “Sane governments do not cast doubt on the pledge to honor their debts – which is why, if reason prevailed, the debt ceiling would simply be scrapped.”