With the debt ceiling projected to come back in play sometime in December or January, it is helpful to be reminded of the cost of the last debt ceiling debate. For a discussion and backgrounder on the federal debt ceiling, see CRFB's primer from last summer.
In terms of new developments, the Government Accountability Office has released a new report that estimates the cost of delaying the debt ceiling increase and the extraordinary measures taken by the Treasury Department. Among the measures were suspending the issuance of State and Local Government Series (SLGS) securities, contributions to pension schemes for government and postal workers, and reinvestment of Treasury securities held as investments by the Exchange Stabilization Fund.
The report estimated that uncertainty from the drawn out fight and last minute resolution lead to higher interest rates on longer-term bonds in the range of 0.3 percentage points (or about 30 basis points). This rise in interest rates increased borrowing costs by $1.3 billion in 2011, and more than that including subsequent years. This may be small compared to the savings from the resulting Budget Control Act, but it was unnecessary considering the solution could have come much sooner.
The GAO report notes that this figure also does not account for the time and resources used by the Treasury Department to manage the debt limit and when looking at the wider economic consequences it is clear that last summer showdown was not without serious cost. If the debt ceiling is to have a useful purpose, it must remind Congress to consider the impact on debt when making future fiscal decisions. The GAO recommends this as well:
Congress usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect. This approach to raising the debt limit does not facilitate debate over specific tax or spending proposals and their effect on debt. In February 2011, we reported, and continue to believe, that Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue to avoid potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way.
In fact, it may be preferable to replace the debt ceiling with a fiscal rule that would automatically restrain deficits and debt in some way if they got out of hand. In addition, the rule could be adjusted for changes in the economy so as to be more flexible in the face of changing circumstances. It certainly would be preferable to the debt limit, which exists independently of the budget process and creates undue uncertainty as we near it.