This week the Government Accountability Office (GAO) issued a report on the need to modify the statutory debt limit to reduce the risk of a government default and avoid the adverse consequences such a default would have on financial markets and the economy.
The Constitution grants Congress the power to borrow money on the credit of the United States. Congress exercises this power by granting the Secretary of the Treasury the authority to borrow money, subject to an overall limit. This limit has been periodically increased over time, most recently, the limit was suspended through January 1, 2025.
That means next year the limit will be reinstated at roughly $36 trillion – the size of the current total national debt – and the Treasury Department will begin taking extraordinary measures to temporarily postpone a default until Congress and the President agree to increase or suspend the debt limit again.
In previous years, partisan disagreements over the need to reduce future deficits have delayed legislative action to increase the debt limit enough to accommodate previous tax and spending decisions.. These delays have resulted in a downgrade of U.S. government securities by two of the major credit rating agencies and a “negative” outlook by the third agency due to the potential risk of a default.
The latest GAO report outlines the potentially severe consequences a government default would have on financial markets and the economy, as summarized in the figure below.
The GAO report urged Congress to replace the current debt limit process with an alternative that links the debt limit to the tax and spending decisions that result in additional debt at the time those decisions are made. Currently, Congress can reduce taxes or increase spending without regard to the additional debt that will result from its decisions. GAO suggested the following alternatives:
Alternative 1: Link action on the debt limit to the budget resolution.
Alternative 2: Provide the administration with the authority to increase the debt limit, subject to a Congressional motion of disapproval.
Alternative 3: Delegate broad authority to the administration to borrow as necessary to finance laws enacted by Congress and the President.
According to GAO, increasing the debt limit does not authorize new spending, it merely allows the Treasury Department to borrow the funds needed to meet existing obligations. By linking future debt limit increases to the tax and spending decisions that result in more debt, Congress can avoid the adverse consequences of a government default.
