For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
The budget process focuses on the short term, often at the expense of longer-term considerations. This distortion allows policies to be crafted in ways that mask their true costs, and produces results that downplay looming fiscal challenges. The short-term focus leads to many poor outcomes, such as emphasis on short-term deficit reduction (with little improvement in the long-term fiscal outlook), the use of “timing gimmicks” designed to obscure the budgetary impact of policy choices, and the reliance on one-time savings are to ensure “deficit neutrality” within a budget window but deficit increases beyond it.
The short-term focus also causes policymakers to undervalue policies which produce modest savings in the near term but grow significantly over time, including changes to gradually slow the growth of health and retirement programs, or that exempt current beneficiaries of a given program or tax break.
In addition, the short-term focus has led many in Washington to brag that the fiscal situation is under control based on a short-term improvement in the deficit despite the fact that the debt is projected to grow faster than the economy over the medium and long term. (see Deficit Falls to $483 Billion, but Debt Continues to Rise)
The short-term emphasis is the result of both an overreliance on ten-year budget windows for scoring and analysis, and insufficient enforcement of long-term fiscal goals. Modifying the rules governing the budget process could be a powerful tool to help correct this myopic thinking. We suggest several possible remedies:
- Require long-term estimates for significant legislation
- Codify rules prohibiting legislation from increasing long-term deficits
- Allow long-term savings targets for reconciliation
- Establish a second-five-year test for PAYGO
- Require annual budget documents to include long-term information
- Expand the use of accrual accounting where appropriate
In the coming months and years, lawmakers will face a number of important budget-related deadlines, or Fiscal Speed Bumps, that will require legislative action. These Fiscal Speed Bumps will present challenges, risks, and opportunities. Addressed irresponsibly, they could cause serious disruptions and/or add as much as $3 trillion to the debt over the next decade above what current law would allow. But if dealt with thoughtfully, they offer an opportunity to pursue reforms that would grow the economy, improve the policy landscape, and reduce the risk of an uncontrollably growing national debt.
We have identified six major speed bumps this year and one next year that is significant enough that it should be dealt with in 2015. These speed bumps include:
- Expiration of the CR funding Homeland Security (February 27, 2015)
- Reinstatement of the debt ceiling (March 16, 2015/Fall 2015)
- Expiration of the “doc fix” and return of the SGR (March 31, 2015)
- Expiration of the highway bill, insolvency of the Highway Trust Fund (May 31, 2015)
- Expiration of 2015 appropriations, return of sequestration (October 1, 2015)
- Deadline to renew tax extenders retroactively (December 31, 2015)
- Insolvency of the Social Security Disability Insurance Trust Fund (late 2016)
In Fiscal Speed Bumps: Challenges, Risks, and Opportunities we discuss each of these moments in detail, put them into historical context, and explain the options available to policymakers as they navigate these speed bumps.
Each of these Fiscal Speed Bumps must be addressed to avoid a major disruption and in each case, unfortunately, addressing the issue irresponsibly could substantially worsen an already unsustainable fiscal situation.
Instead, policymakers should use these speed bumps as opportunity to pursue responsible changes that result in better policy, a stronger economy, and a more sustainable long-term debt path.
Read the full paper below, or download a printer-friendly version here.
Note: The paper has been updated from its original posting to clarify that the $3 trillion difference in debt is above what current law allows (assuming trust funds cannot borrow) rather than CBO's baseline.
In the coming months, Congress and the President will face a number of important decisions with significant fiscal implications. Specifically, they must decide how to address “Sustainable Growth Rate” (SGR) cuts, which threaten to significantly reduce Medicare physician payments next April, and 55 “tax extenders” that expired at the end of last year.
If policymakers address these two issues irresponsibly, they could add up to $1 trillion to the debt over the next decade. Yet policymakers could also use these moments to make a down payment toward tax and entitlement reforms that slow health care cost growth, speed economic growth, and help put the debt on a sustainable long-term path.
To responsibly address the Sustainable Growth Rate, policymakers should:
- Permanently replace the SGR with a value-based payment system
- Fully offset any costs relative to current law
- Enact offsets that bend the health care cost curve and are gimmick-free
To responsibly address the expired tax extenders, policymakers should:
- Address most tax extenders permanently in the context of tax reform
- Fully offset the cost of any continued extenders without undermining tax reform
- Include a fast-track process to achieve comprehensive tax reform
There are many ways to achieve these goals. The Paying for Reform and Extension Policies (PREP) Plan represents one such approach. We assume, but don’t endorse, the Tricommittee SGR bill and two years of tax extenders and propose $170 billion of SGR offsets that bend the health care cost curve, $83 billion of extender offsets that improve tax compliance, and a fast-track process for tax reform. Offsets would total $250 billion over ten years.
Summary of the PREP Plan (Costs/Savings over Ten Years)
|Enact Tricommittee SGR Reform||$170 billion
||Extend "Tax Extenders" to 2015
|Reform Provider Incentives
||-$80 billion||Improve Tax Enforcement||-$35 billion|
|Reform Beneficiary Incentives||-$80 billion||Close Tax Avoidance Loopholes||-$45 billion|
|Reduce Medicaid Costs||-$10 billion||Restrict Inversions||-$3 billion|
|Total Offsets||-$170 billion||Total Offsets||-$83 billion|
|Set Up Fast Track Process for Comprehensive Tax Reform||TBD|
|Ten-Year Deficit Impact : $0|
Read the full paper below, or download a printer-friendly version here.
This paper has been updated for FY 2015 and is now located here.
Original October 8th: the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion. While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary.
The FY2014 budget deficit totaled $483 billion, according to today’s statement from the Treasury Department. Although this is nearly 30 percent below the FY2013 deficit and 66 percent below its 2009 peak, the country remains on an unsustainable fiscal path.
In this paper, we show:
- Annual deficits have fallen substantially over the past five years, largely due to rapid increases in revenue (mostly from the economic recovery), the reversal of one-time spending during the financial crisis, small decreases in defense spending, and slow growth in other areas.
- Simply citing the 66 percent fall in deficits over the past five years without context is misleading, since it follows an almost 800 percent increase that brought deficits to record-high levels.
- Even as deficits have fallen, debt has continued to rise, more than doubling as a percent of GDP since 2007 to record levels not seen other than during a brief period around World War II.
- Both deficits and debt are projected to rise over the next decade and beyond, with trillion-dollar deficits returning by 2025 and debt exceeding the size of the economy before 2040, and as soon as 2030.
Unfortunately, the recent fall in deficits is not a sign of fiscal sustainability.
The Deficit in FY2014
According to the Treasury Department, the federal deficit totaled $483 billion in FY2014 (an initial estimate from the Congressional Budget Office on October 8th estimated the deficit at $486 billion), with $3.02 trillion of revenue and $3.50 trillion of spending. The figure below largely reflects CBO’s estimates rather than Treasury’s final numbers.
Since 2009, the budget picture has changed significantly, with deficits falling by 66 percent, from $1.4 trillion to slightly under $500 billion. This reduction was driven largely by the 44 percent (roughly $900 billion) increase in tax collections, primarily a result of the economic recovery, which has helped restore revenues as a share of GDP from their depressed 2009 levels to about their historical average. New taxes from the American Taxpayer Relief Act and the Affordable Care Act have also played a role.
At the same time, nominal spending is nearly $15 billion lower than in 2009, even as the economy grows, and inflation erodes its value. The decreases are largely driven by the absence and reversal of financial rescue and economic recovery spending through the Troubled Asset Relief Program (TARP), the rescue of Fannie Mae and Freddie Mac, and the stimulus, though defense spending has also fallen. Most other categories of spending have grown in nominal terms; however, Medicare, non-defense discretionary spending, and interest costs have grown more slowly than was expected.
Importantly, at $483 billion (2.8 percent of GDP), last year’s deficit was still substantially higher than the pre-recession deficit of $161 billion (1.1 percent of GDP) in 2007.
Deficits Fell From Record Levels But Will Rise Again
A 66 percent drop in annual deficits since 2009 is certainly significant, but when put in context it is less impressive than some would suggest. The rapid fall was from record-high levels and followed a rapid increase. At $1.4 trillion, the 2009 deficit was the highest ever as a share of the economy except during World War II (and in real dollar terms, the highest in history), having increased 779 percent from 2007 as a result of the Great Recession and measures enacted to combat it.
Moreover, while legislated spending reductions, tax increases, and other factors played a role, the end of trillion-dollar deficits was mostly the expected result of the economic recovery and the fading of measures intended to boost the recovery. As unemployment rates have fallen and GDP recovers, revenue collection has risen to more normal levels and countercyclical spending in areas such as unemployment insurance and food stamps has begun to subside. Meanwhile, stimulus and financial rescue measures enacted to speed the recovery have mostly wound down.
Unfortunately, even with these gains, the deficit remains more than three times as high as in 2007 (1.7 percentage points higher as a percent of GDP) and is projected to grow over time. Under CBO’s current law baseline, annual deficits will return to trillion-dollar levels by 2025. Under their more pessimistic Alternative Fiscal Scenario, the deficit will reach $1.5 trillion in 2025, exceeding the nominal-dollar record set in 2009.
As Deficits Fall, the Debt Keeps Rising
Arguably the most important metric of a country’s fiscal health is its debt-to-GDP ratio. And unfortunately, even as deficits have fallen the last five years, debt has grown. Indeed, over the same period that deficits fell by 66 percent, nominal debt held by the public grew by 69 percent – from $7.5 trillion to $12.8 trillion. As a percent of GDP, debt has grown extremely rapidly, from 35 percent of GDP in 2007 to 52 percent of in 2009 and to over 74 percent in 2014.
Falling deficits have not prevented the debt from growing; rather, they have only slowed down the growth trend. While the debt-to-GDP ratio may stabilize for a few years, debt is projected to continue growing faster than the economy over the long run. As the population ages, health care costs grow, and interest rates rise to more normal levels, CBO projects debt will rise from 73 percent of GDP in 2018 to 77 percent of GDP by 2024, and will exceed the size of the economy before 2040. Under CBO’s Alternative Fiscal Scenario (AFS), debt will exceed the size of the economy before 2030.
The fact that deficits have fallen from their trillion-plus dollar levels is an encouraging sign that the economy continues to recover. Unfortunately, Washington’s myopic focus on short-term deficits has likely slowed the recovery by cutting deficits somewhat too fast in the short term while leaving substantial imbalances in place over the long term.
While the deficit has indeed dropped significantly, this drop followed a massive increase, was largely expected, and does not suggest the country is on a sustainable fiscal path. Currently, debt levels are at historic highs and projected to grow unsustainably over the long run.
In only a decade, deficits are projected to again exceed $1 trillion, and within 15 to 25 years debt is projected to exceed the entire size of the economy.
Policymakers must work together on serious tax and entitlement reforms to put debt on a clear downward path relative to the economy, not declare false victories and sweep the debt issue under the rug.
Download a printer-friendly version of the paper here.
For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
Forty years ago, President Nixon signed the Congressional Budget and Impoundment Control Act of 1974 (“The Budget Act”) into law, establishing the modern budget process and institutions. Enacted to settle ongoing clashes between the executive and legislative branches, the Budget Act established procedures and institutions to allow Congress to establish its own budget priorities independent of the executive branch and provide a framework to guide and coordinate legislation affecting spending and revenues within overall budgetary limits.
At first, the new budget process established by the Budget Act gave Congress a stronger framework with which to budget and govern much more effectively. But after 40 years, the Budget Act is starting to show its age.
There is a growing consensus that the budget process is broken. After functioning relatively well for more than two decades, Congress has increasingly moved to dealing with budget issues on an ad hoc basis. Congress adopted an annual budget resolution, approved by both chambers, each fiscal year from 1976 through 1998. Since then, however, there have been eight fiscal years in which Congress has not approved a budget resolution. Furthermore, Congress has increasingly relied on temporary patches to fund parts of the federal government rather than full-year appropriations.
Statutory deadlines throughout the budget process are regularly ignored. Budget resolutions are rare. Fiscal controls that are in place are routinely circumvented, waived, or ignored. Temporary policy fixes, often involving gimmicks, are legislated at the last minute.
Congress remains preoccupied with the next crisis or deadline, while the majority of spending and tax policies are on autopilot, leading to a system where our national priorities are neither fully thought out nor fully funded. Not only has Congress not complied with the Budget Act, but the Budget Act has not kept up with Congress and the changing nature of spending programs and the tax code. Items such as emergency spending, government-sponsored enterprises, credit programs, tax expenditures, budget baselines, and temporary provisions all impose challenges to sound budgeting under our current practices. The country’s substantial long-term challenges underscore the problems with the budget process, as an increasing portion of the budget is on autopilot and continues to grow at an unsustainable rate that threatens long-term fiscal sustainability.
To be sure, lawmakers have made some improvements to the budget process and created new rules for fiscal responsibility – including the establishment of pay-as-you-go laws, discretionary spending caps, and a host of other rules. But the process is increasingly outdated and overly complicated, and Senate and House rules and points of order have merely been layered on top of a statutory process that few understand.
Reform is needed, but deciding how to reform the process to make it work better first requires understanding the problems and flaws with the current system. This paper aims to outline those issues.
See the full paper below, or download it here.
Update: After publication we wrote a series of blogs providing options for offsets or to bring spending and revenue in line. As well in May 2015 we published a plan to deal with the Highway Trust Fund shortfall permanently.
Congress is facing two upcoming deadlines regarding surface transportation programs. At the end of September, the current authorization for highway programs expires and must be renewed. More immediately this summer, the Highway Trust Fund (HTF) will have insufficient funds to continue operating. Failing to replenish this trust fund will cause serious disruption and bring many transportation projects to a stand-still. On the other hand, allowing the HTF to continue to spend beyond dedicated revenue could worsen an already dismal federal debt situation. Fortunately, there are responsible ways forward.
Highway spending has exceeded gas tax and other dedicated revenues regularly over the past decade, and this shortfall will only grow over time. Dedicated revenues currently fund less than three-quarters of total HTF spending, a concern that lawmakers have addressed in recent years by transferring $54 billion of mostly general tax revenue into the HTF (only $15 billion was paid for and partially with a gimmick). In FY2015 alone, highway spending could exceed revenues by nearly $15 billion, and over the next decade that gap will approach $170 billion.
There is broad bipartisan support for funding highways and other transportation infrastructure, which can both help to create jobs in the near-term and enhance long-term economic growth by fostering commerce, communication, tourism, and trade. Unfortunately, policymakers have so far been unable to agree on how to pay for desired levels of highway spending. In the coming months, Congress and the President must identify and agree to a fiscally responsible solution to close the HTF shortfall.
The best approach to address the shortfall would be a long-term highway bill that aligns dedicated revenues with transportation spending. Transferring funds from general revenue into the HTF would be an acceptable alternative if and only if those funds were fully offset with real spending cuts and/or tax increases elsewhere in the budget. Under no circumstance should lawmakers rely on a deficit-financed (or gimmick-financed) general revenue transfer to fund the HTF.
In addition to addressing the funding shortfall facing our highways, policymakers should use the highway bill to ensure better prioritization of funding projects and, importantly, to reform the budgetary treatment of highway spending. The HTF has a unique treatment in the budget, making it immune to the normal forms of budget discipline that ensure policymakers account for the full costs of legislation they pass.
See the full paper below, or download it here.
Update: We've corrected the paper for a typo since publication. The original paper cited that a VMT of 18.5 cents per mile would provide enough revenue to replace all transportation taxes and fully fund the HTF. The correct figure is 1.85.
Update 6/30/14: We previously reported the necessary cushion for smooth reimbursements to the states at $6 billion, but a more recent letter from CBO indicates the figure is $5 billion.
Note: We have updated this paper, please see our Updated Appropriations 101.
What are appropriations?
Appropriations are annual decisions made by Congress about how the federal government spends some of its money. In general, the appropriations process addresses the discretionary portion of the budget – spending ranging from national defense to food safety to education to federal employee salaries, but excludes mandatory spending, such as Medicare and Social Security, which is spent automatically according to formulas.
How does Congress determine the total level of appropriations?
Under current law, after the President submits the Administration’s budget proposal to Congress, the House and Senate Budget Committees are each directed to report a budget resolution, which if passed by their respective houses, would then be reconciled in a budget conference (see Q&A: Everything You Need to Know About a Budget Conference). The resulting budget resolution, which is a concurrent resolution and therefore not signed by the President, includes what is known as a 302(a) allocation that sets a total amount of money for the Appropriations Committees to spend.
If a concurrent budget resolution does not pass both chambers, each house then may adopt legislation “deeming” 302(a) allocations – a practice which has become increasingly common in recent years. For example, the recent Bipartisan Budget Act directed the Budget Committee Chairs in the House and Senate to set the 302(a) limit for FY2015 at $1.014 trillion.
In addition, discretionary spending is currently subject to statutory spending caps. The Budget Control Act of 2011 set discretionary caps through 2021, which were modified for 2013, 2014, and 2015 by the American Taxpayer Relief Act of 2012 and Bipartisan Budget Act of 2013. Beyond 2015, the statutory caps set by the Budget Control Act are reduced by about $90 billion annually through an enforcement mechanism known as “sequestration” (see Understanding the Sequester) implemented after the failure of the Joint Select Committee on Deficit Reduction to produce legislation to reduce the debt.
How does Congress allocate appropriations?
Once they receive 302(a) allocations, the House and Senate Appropriations Committees set 302(b) allocations to divide total appropriations among 12 subcommittees, each dealing with a different part of the budget. Those subcommittees must then decide how to distribute funds within their 302(b) allocations. These 302(b) allocations are voted on by the respective Appropriations Committees but are not subject to review or vote by the full House or Senate. The table below lists the FY2014 regular (non-war, non-disaster) appropriations, along with the President’s budget request for FY2015 and House FY2015 302(b) allocations for each of the subcommittees.
Each subcommittee must propose a bill that ultimately must pass both chambers of Congress and be signed by the President to take effect. Although the budget process calls for 12 individual bills, many of them are often combined into what is known as an omnibus appropriations bill and sometimes a few are combined into what has been termed a minibus appropriations bill.
How are appropriations levels enforced?
If any appropriations bill or amendment in either house exceeds the 302(b) allocation for that bill, causes total spending to exceed the 302(a) allocation, or causes total spending to exceed statutory spending caps, then any Member of Congress can raise a budget “point of order” against consideration of the bill. The point of order can be waived by a simple majority in the House as part of the rule for floor consideration of the bill and overridden by a 60-vote majority in the Senate. If, despite these points of order, Congress enacts legislation increasing spending beyond the defense or non-defense caps, then the President must issue a sequestration order to reduce discretionary spending across-the-board in the category in which the caps were exceeded, effective 15 days after Congress adjourns for the year. Importantly, certain types of discretionary spending – including for overseas contingency operations and for designated emergencies – do not count against the statutory caps.
What happens if funds are needed outside of the appropriations process?
Congress can pass a supplemental appropriations bill in situations that require additional funding immediately, rather than waiting until the following year’s appropriations process. Supplementals are often used for emergencies such as natural disasters or military actions. Occasionally, Congress has used supplemental appropriations to stimulate the economy or to provide more money for routine government functions after determining that the amount originally appropriated was insufficient. Supplemental appropriations bills are subject to the same internal and statutory spending limits as regular appropriations. They require the same offsets to ensure they do not exceed spending limits, unless designated as emergency spending.
What role does the President play in the appropriations process?
Although the President has no power to set appropriations, he influences both the size and composition of appropriations by sending requests to Congress. Specifically, each year the President’s Office of Management and Budget (OMB) submits a detailed budget proposal to Congress based on requests from agencies. The appendix to the President’s budget submission contains much of the technical information and legislative language used by the Appropriations Committees. In addition, the President must sign or veto each of the 12 appropriations bills, giving him additional influence over what the bills look like.
What is the timeline for appropriations?
The 1974 Budget Act calls for the President to submit his budget request by the first Monday in February and for Congress to agree to a concurrent budget resolution by April 15th. The House may begin consideration of appropriations bills on May 15th even if a budget resolution has not been adopted, and is supposed to complete action on appropriations bills by June 30th. However, none of these deadlines are enforceable and they are regularly missed. The practical deadline for passage of appropriations is October 1st, when the next fiscal year begins and the previous appropriation bills expire. For a full timeline of the budget process click here.
What happens if appropriations bills do not pass by October 1?
If the appropriations bills are not enacted before the fiscal year begins on October 1st, federal funding will lapse, resulting in a government shutdown. To avoid a shutdown, Congress will often pass a continuing resolution, which allows for continued funding, providing additional time for completion of the appropriations process. If Congress has passed some, but not all, of the 12 appropriations bills, a partial government shutdown can occur.
What is a continuing resolution?
A continuing resolution, often referred to as a CR, is a temporary bill that continues funding for all programs based on a fixed formula, usually prior year funding levels. Congress can pass a CR for all or just some of the appropriations bills. CRs can increase or decrease funding and can include “anomalies,” which adjust spending in certain accounts to avoid technical or administrative problems caused by continuing funding at current levels, or for other reasons.
What happens during a government shutdown?
A shutdown represents a lapse in available funding, and during a shutdown the government stops most non-essential activities related to the discretionary budget. To learn more see Q&A: Everything You Should Know About Government Shutdowns.
Do agencies have any discretion in how they use funds from appropriators?
Executive branch agencies must spend funds provided by Congress in the manner directed by Congress in the text of the appropriations bills. Appropriations bills often contain accompanying report language with additional directions, which are not legally binding but are generally followed by agencies. Congress often provides broad authority, which gives agencies more control in allocating spending. However, in some instances, Congress will provide for very narrow authority or can use funding limitation clauses to tell agencies what they cannot spend the money on. Agencies have some authority to reprogram funds between accounts after notifying (and in some cases getting approval from) the Appropriations Committees.
Authorization bills create, extend, or make changes to the law and specific programs and specify the amount of money that appropriators may “spend” on a specific program, in other cases leaving the amount open ended. Appropriations bills then provide the discretionary funding available to agencies and programs that have already been authorized. For example, an authorization measure may create a food inspection program and set a funding limit for the next five years. However, that program is not funded by Congress until an appropriations measure is signed into law. The authorization bill designs the rules and sets out the details for the program, while the appropriations bill provides the actual resources to execute the program. In the case of mandatory spending, an authorization bill both authorizes and appropriates the funding for a specific program, without requiring a subsequent appropriations law.
Where are the House and Senate in the current appropriations process?
Both the Senate and House have deemed their 302(a) allocations at $1.014 trillion for regular appropriations pursuant to the Bipartisan Budget Act of 2013. Currently, both chambers are working on writing and passing individual appropriations bills. To follow the progress of individual appropriations bills throughout the process, see our Appropriations Watch: FY2015.
Attention is turning towards raising the federal debt ceiling, which will be reinstated after February 7th. At that point, the limit will be about $17.3 trillion, according to estimates from the Bipartisan Policy Center. At that time, the Treasury Department would have to begin use of a limited amount of accounting tools at their disposal, called extraordinary measures, to avoid defaulting on their obligations. However, even with such measures, the Treasury Department estimates that they will only be able to continue paying the nation’s bills until late February, by which point the debt ceiling would need to be raised. The following is a short primer on the debt ceiling and on the ways to responsibly address it while also dealing with unsustainable federal borrowing going forward.
What is the debt ceiling?
The debt ceiling is the legal limit on the total level of federal debt the government can accrue. The limit applies to almost all federal debt (certain types of debt are exempt, but are quite small in value), including the debt held by the public and what the government owes to itself through various accounts, like the Social Security and Medicare trust funds. As a result, the debt subject to limit increases both as a result of annual budget deficits financed by borrowing from the public and trust fund surpluses, which are invested in Treasury bills.
The agreement that ended the government shutdown in October 2013 also suspended the debt limit through February 7th. After that, the statutory debt limit will be reinstated at the amount necessary to encompass all federal borrowing to that date – around $17.3 trillion, according to the Bipartisan Policy Center. That amount will be composed of roughly $12.3 trillion in debt held by the public and $5 trillion in debt held by government accounts. Most economists, however, feel debt held by public is the more relevant measure of the economic impact of government debt.
When was the debt ceiling established?
The first iteration of the debt ceiling was established in 1917 and set at $11.5 billion under the Second Liberty Bond Act. Prior to this, Congress was required to approve each issuance of debt separately. The ceiling was enacted to simplify the process and enhance borrowing flexibility. In 1939, Congress created the first aggregate limit covering nearly all government debt and set it at $45 billion, about 10 percent above the total debt at that time.
How much has the debt ceiling grown?
Since it was established, Congress and the President have increased the debt ceiling roughly 100 times. During the 1980s, the debt ceiling increased from less than $1 trillion to nearly $3 trillion. Over the course of the 1990s, it doubled to nearly $6 trillion, and in the 2000s, it again doubled to over $12 trillion. The Budget Control Act of 2011 automatically raised the debt ceiling by $900 billion and gave the President authority to increase the limit by an additional $1.2 trillion to $16.394 trillion. In February of 2013, lawmakers temporarily suspended the debt ceiling through May, resulting in a de facto increase of about $305 billion and bringing the debt ceiling to its current level of $16.699 trillion. In October, lawmakers again suspended the debt ceiling until February 7, 2014, which will result in a de facto increase around $600 billion and bring the current debt limit up to $17.3 trillion.
Fig. 1: Statutory Debt Limit and Federal Debt Subject to Limit
Why is Congress debating this now?
The president signed the Default Prevention Act of 2013 into law on October 17, 2013, which temporarily suspended the statutory debt limit through February 7, 2014. At that point, the debt ceiling will automatically be raised to roughly $17.3 trillion to cover new borrowing since suspension. If the debt limit is not raised further to cover additional borrowing after February 7th, the Treasury will have to employ “extraordinary measures” to avoid breaching the debt ceiling (see more about this below). According to Treasury Secretary Jack Lew, all borrowing authority, including the amount freed up through extraordinary measures, will be exhausted by late February, at which time they would have to rely only on remaining cash on hand and incoming receipts to pay obligations, and a formal debt limit increase or suspension would soon be necessary to avoid default. The Bipartisan Policy Center independently estimates that extraordinary measures and cash on hand will run out between February 28th and March 25th. After this “X Date”, the U.S. could only pay obligations with incoming receipts, forcing the Treasury to delay and/or miss many payments since the federal government currently runs substantial deficits in February and March.
Can hitting the debt ceiling be avoided without Congressional action?
The Treasury Department can use a variety of accounting tricks known as “extraordinary measures” to postpone the need to raise the debt ceiling. For example, it can prematurely redeem Treasury bonds held in federal employee retirement savings accounts (and replace them later plus interest), halt contributions to certain government pension funds, or borrow from money set aside to manage exchange rate fluctuations. Some believe the Treasury Department could buy even more time by engaging in other, unprecedented actions, such as selling large amounts of gold, minting a special large-denomination coin, or invoking the Fourteenth Amendment to override the statutory debt limit. Whether any of these tools is truly available is in question—the Obama Administration has ruled out all three—and the potential economic and political consequences of each of these options are unknown.
What happens if the debt ceiling is hit?
Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue additional debt. At that point, the government must rely on its remaining cash on hand and incoming receipts to pay all obligations. However, when the federal government is in a period of running annual deficits – as is the case today – incoming revenues to the federal government are insufficient to cover all of the government’s obligations, be it salaries for federal civilian employees and the military, utility bills, veterans’ benefits, or Social Security payments, to name a few.
Traditionally, February is the month with the highest deficit-spending in the year, because the Internal Revenue Service (IRS) sends out many tax refund checks. If this February follows a similar pattern as last year, more than half of the government’s obligations would have to go unpaid once the government is forced to rely on incoming receipts alone to pay bills. If an impasse continued into March, roughly 25 percent of that month’s bills would go unpaid. In addition to failing to meet its regular obligations, the government could also potentially default on interest payments on the debt.
A default, or even the perceived threat of a default, could have serious negative economic implications. An actual default would roil global financial markets and create chaos, as both domestic and international markets depend on the relative economic and political stability of U.S. debt instruments and the U.S. economy. Interest rates would rise as demand for Treasuries would account for the increased risk of default, with demand for Treasury bills dropping as investors stop or scale back investments in Treasury securities if they are no longer considered a perfectly safe investment. Even the threat of default can raise borrowing costs: GAO has estimated that the 2011 debt limit debate led to higher interest rates on Treasuries issued during the standoff based on concerns about a potential default, which cost the federal budget $1.3 billion that year and an estimated $19 billion over a decade, according to extrapolations from the Bipartisan Policy Center. An actual default would have a far greater and longer-lasting effect on interest rates than the potential default during the 2011 standoff.
Higher interest rates for Treasuries would increase interest rates across the economy, affecting car loans, credit cards, home mortgages, business investments, and other costs of borrowing and investment. The balance sheets of banks and other institutions with large holdings of Treasuries would decline as the value of Treasuries dropped, potentially tightening the availability of credit.
How does a shutdown differ from a default?
In a shutdown, government temporarily stops paying employees and contractors who perform government services, whereas the list of parties not paid in a default is much broader (See Q&A: Everything You Should Know About Government Shutdowns). In a default, the government exceeds the statutory debt limit and is unable to pay on time some of its obligations to its citizens or creditors. Without enough money to pay the bills, any of its payments are at risk, including all government spending, mandatory payments, interest on our debt, and payments to U.S. bondholders. Whereas a government shutdown would be disruptive, a government default could be disastrous.
Have policymakers used the debt ceiling to pursue deficit reduction in the past?
Although policymakers have often enacted “clean” debt ceiling increases, Congress has coupled such increases with other legislative changes on many occasions. In a number of cases, Congress has attached debt ceiling increases to budget reconciliation legislation and other deficit-reduction policies or processes.
Indeed, most of the major deficit-reduction agreements made since 1980 have been accompanied by a debt ceiling increase. Causality has moved in both directions, though. On some occasions, the debt limit has been used successfully to help prompt deficit reduction, and in other instances, Congress has tacked on debt ceiling increases to deficit-reduction efforts.
Notably, in nearly all instances in which a debt limit increase was either accompanied by deficit-reduction measures or included in a deficit-reduction package, lawmakers have generally approved temporary increases in the debt limit to allow time for negotiations to be completed without the risk of default. For example, Congress approved a modest increase in the debt limit in December 2009 while negotiations over Statutory PAYGO and establishment of the National Commission on Fiscal Responsibility and Reform were ongoing. During the negotiations and consideration of the 1990 budget agreement, Congress approved six temporary increases in the debt limit before approving a long-term increase in the limit as part of the reconciliation bill implementing the deficit-reduction agreement.
Further discussion regarding past uses of the debt ceiling can be found in the Appendix.
What should policymakers do?
Failing to raise the debt ceiling would be disastrous. It would result in severe negative consequences that experts are not capable of fully knowing in advance. Even threatening a default or taking the country to the brink of default could have serious negative repercussions. Importantly, though, failing to control the debt could ultimately stunt economic growth, reduce fiscal flexibility, and increase the cost burden on future generations. But political advantage should not be sought by bringing America close to the brink of default. If lawmakers wish to accomplish deficit reduction, they should at least pass temporary increases of the debt limit to avoid nearing the brink.
Given these risks, Congress and the President must raise the debt ceiling – and they should do so as soon as possible. Yet they should also continue to work toward putting our debt on a sustainable long-term path. Specifically, policymakers should observe strict adherence to pay-as-you-go rules, reform the tax code to encourage growth and raise more revenue, and slow the growth of entitlement programs so they are affordable for future generations.
Although the need to raise the debt ceiling can serve as a useful moment for taking stock of our fiscal state, lawmakers must not jeopardize the full faith and credit of the U.S. government.
Where can I learn more?
- Committee for a Responsible Federal Budget – Understanding the Debt Limit
- Bipartisan Policy Center – Debt Limit Analysis
- The Treasury Department – Debt Limit Resources
- Committee for a Responsible Federal Budget – Debt Ceiling Tracker 2013
- Government Accountability Office – Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs
- Congressional Budget Office – Federal Debt and the Statutory Limit, November 2013
Appendix: Examples of How Debt Ceiling Has Been Used in the Past
The Gramm-Rudman-Hollings Act in 1985: The Gramm-Rudman-Hollings Act (GRH) in 1985 raised the debt limit by $175 billion and also set a target to have a balanced budget by 1991, with across-the-board cuts in spending by sequestration designed as an enforcement mechanism. Although the deficit-reduction goals under GRH were not fully achieved, the experience gained under the act contributed to the development of more workable and effective procedures five years later.
Omnibus Budget Reconciliation Act of 1990: The Omnibus Budget Reconciliation Act (OBRA) of 1990 raised the debt limit by $915 billion, the largest increase up until that point, but also contained nearly $500 billion in deficit reduction over the next five years and created enforcement procedures in the Budget Enforcement Act (BEA), which helped lead to the budget surpluses in the late 1990s. The BEA created adjustable limits for separate categories of discretionary spending and the pay-as-you-go (PAYGO) procedure that required tax cuts or increases in mandatory spending to be offset. Congress approved six temporary increases in the debt limit while negotiations were ongoing and Congress was considering legislation implementing the budget agreement.
Omnibus Budget Reconciliation Act of 1993: The Omnibus Budget Reconciliation Act of 1993 raised the debt limit by $600 billion, an increase that lasted for about two and a half years. OBRA '93 was the second major deficit-reduction package of the 1990s, also containing nearly $500 billion in deficit-reduction over five years. The agreement extended the original spending caps from 1990 and raised taxes on high earners, among other reforms.
Balanced Budget Act of 1997: The Balanced Budget Act of 1997 included a $450 billion debt limit increase which, thanks to the surpluses of the late 1990s and early 2000s, was enough to cover debt until 2002. At the time, the legislation called for about $125 billion of net deficit reduction over five years and $425 billion over ten years. It did so mainly through reductions in health care spending via provider payment reductions and increased premiums. The Act also created a few new programs – Medicare+Choice (later renamed Medicare Advantage or Medicare Part C) and the State Children’s Health Insurance Program (SCHIP).
Statutory PAYGO Act of 2010: The Statutory PAYGO Act of 2010 contained a debt limit increase of $1.9 trillion, the largest nominal increase ever enacted until that point in time. The legislation also reinstituted statutory PAYGO procedures that require tax cuts and mandatory spending increases to be fully offset (with some exemptions). Informally, the agreement to raise the debt ceiling also led to the creation of a National Commission on Fiscal Responsibility and Reform, to which President Obama later appointed Erskine Bowles and former Senator Al Simpson as co-chairs.
Budget Control Act of 2011: The Budget Control Act (BCA) gave the President the authority to increase the debt limit in tranches – subject to a Congressional motion of disapproval – by a total of $2.1 trillion. The BCA also contained $917 billion in deficit reduction over ten years, primarily through caps on discretionary spending. In addition, the bill established the Joint Committee on Deficit Reduction (“Super Committee”) to produce deficit-reduction legislation of at least $1.2 trillion in savings, with budget sequestration to begin in 2013 as an enticement for the Super Committee to succeed. The bill also required Congress to vote on a Balanced Budget Amendment, which it did not pass.
No Budget, No Pay Act of 2013: Lawmakers enacted the No Budget, No Pay Act in early February of 2013, which temporarily suspended the debt ceiling through May 18th, 2013 and then set an automatic “catch up” on May 19th that allowed for a $300 billion increase in the debt ceiling. The agreement would have also withheld the pay of Members of Congress if no budget resolution was passed in each House (though there was no requirement that the resolutions being agreed to jointly, which is necessary to go forward with the budget process).
Default Prevention Act of 2013: The Default Prevention Act of 2013 ended a 16-day partial shutdown of the federal government by funding the government through January 15, 2014 and suspending the debt ceiling until February 7, 2014. This agreement set up a bicameral budget conference to reconcile budgets for Fiscal Year 2014, and provided for an automatic “catch up” on February 7th. On that date, the debt ceiling would be reinstated at the current level of borrowing, resulting in a de facto increase of about $600 billion and bringing the debt ceiling to $17.3 trillion.