The House Ways and Means Committee approved a measure last week that would allow the Treasury to continue issuing new debt to pay interest on the publicly held debt and Social Security benefits even if the statutory debt limit has been reached.
The House Ways and Means Committee approved a measure last week that would allow the Treasury to continue issuing new debt to pay interest on the publicly held debt and Social Security benefits even if the statutory debt limit has been reached.
The measure, mislabeled the “Default Prevention Act,” would not actually prevent a default because failure to pay any government obligations is still a default and would be seen as such in global markets.
The legislation attempts to prioritize which payments the government would make if the debt ceiling is reached and Treasury can no longer pay all of its obligations. Under the act, all debts not related to debt held by the public or the Social Security trust funds would be left unpaid.
Treasury Secretary Jack Lew again urged Congress last week to raise the debt limit in a timely manner, reminding lawmakers that failure to do so in the past “has negatively impacted business and consumer confidence, financial markets, and the credit rating of the United States.”
Other so-called “debt prioritization” measures have been proposed in recent Congresses. In addition to not preventing default, they all failed to address the underlying issue of the nation’s fiscal imbalance. Automatic expenditures — those not subject to the annual appropriations process — currently consume over 60 percent of the budget, and are projected to grow larger on autopilot unless Congress takes action. Revenues are not projected to keep up with that growth.
Debt prioritization bills may actually raise the likelihood of default by fostering the impression that the effects of default will not be as severe as have been expected.
Instead of placing an artificial cap on the debt that has no economic rationale and threatens an unnecessary default on obligations that have already been incurred, Congress should focus on moving to a more sustainable fiscal path.
Congress should consider replacing the current debt limit mechanism in favor of one that better holds Congress accountable for the debt effects of fiscal policy choices, and does so without jeopardizing the nation’s creditworthiness and the global economy. The Government Accountability Office recently outlined some alternative approaches.
