It’s January 2025 and under the terms of the June 2023 budget deal, the United States government is once again subject to a limit (roughly $36 trillion) on how much it can borrow. That might strike a lot of people as a good thing and maybe it would be if it actually put an effective brake on $2 trillion deficits for as far as the eye can see. Unfortunately, that is not the case. In its current form, the debt limit provides little incentive for fiscal restraint yet it carries the serious risk of forcing a damaging and needless government default.
As the Government Accountability Office (GAO) has explained:
“The debt limit is not a control on the amount of government spending but rather a limit on the total amount of federal debt that can be outstanding. It is an after-the-fact threshold that restricts Treasury’s borrowing authority to finance already-enacted spending and revenue decisions made by Congress and the President. In effect, borrowing allows the government to meet existing, legally committed obligations, such as Social Security and Medicare benefits, military salaries, interest on the national debt, and tax refunds. Raising the debt limit does not authorize new spending.”
It is this “after-the-fact” nature of the debt limit that makes it so ineffective as a true fiscal restraint. Again, to quote GAO, “the current process allows Congress to increase spending or cut taxes without providing Treasury sufficient borrowing authority to finance these decisions.”
Worse yet, the consequence of separating policy decisions from the borrowing authority needed to implement them is that when the bills come due the Treasury might not be able to pay them in full: in either words, a government default. According to GAO, that result “could have significant and, under certain conditions, devastating consequences for individuals, financial institutions and the economy.”
To be clear, there is no immediate crisis. Despite the new debt limit, the Treasury Department is still able to use “extraordinary measures” to keep its borrowing under the limit and continue paying all the bills. These measures, however, will only last a few months and an attempt to suspend the debt limit for two years as part of the most recent temporary funding bill in December failed.
It thus seems possible that at some point this summer, the Treasury won’t be able to pay all its bills because it won’t be able to issue new debt, and Congress won’t be able to do anything about it because they won’t have the votes to raise or suspend the limit.
What happens then? Nobody knows for sure, but there is no need to wait for a crisis. Top policymakers in both parties realize that the debt limit is in need of reform. In fact, Treasury Secretary Janet Yellen and President-elect Donald Trump, who are not in agreement on most issues, agree that the debt limit should be eliminated.
Yellen told the House Financial Services Committee, “I believe it is very destructive to put the president and myself, as Treasury Secretary, in a situation where we might be unable to pay the bills that result from those past decisions.” In December, Trump told NBC News, “If they want to get rid of it, I would lead the charge.”
Despite support from Trump and Yellen, it seems highly unlikely that a proposal to eliminate the debt limit would go very far in Congress this year. There are, however, reform proposals worth taking a look at, some of which have bipartisan support such as the Responsible Budgeting Act co-sponsored by Representatives Scott Peters (D-CA) and Bill Huizenga (R-MI).
One thing is certain: the debt limit will be raised, suspended, or eliminated this year. It would be best to begin negotiating a consensus solution now, and the way to get there, before the threat of imminent default forces a chaotic and potentially devastating result.
