Debt Limit Deadline: March 16, 2017 – Time for Reform?

One of the first legislative deadlines President-elect Donald Trump and the 115th Congress will face is the need to raise the debt limit. The budget deal brokered last November suspended it until March 15, 2017. However, the Treasury Department can use accounting tools, called “extraordinary measures,” to avoid defaulting on the government’s obligations until mid-summer of 2017. Previous increases in the debt limit have often been accompanied by reforms to improve fiscal discipline or have been part of legislation reducing the deficit; that may be the case with legislation increasing the debt limit next year. The need to increase the debt limit next year could also be an opportunity to reform the process for considering the debt limit to make it a more effective tool for fiscal discipline and avoid brinksmanship.

In 2015, we published a paper through our Better Budget Process Initiative outlining four approaches for reforming the debt limit.

These recommendations include:

Linking changes in the debt limit to achieving responsible fiscal targets

1) Providing presidential authority to increase the debt limit if fiscal targets are met.
2) Providing presidential authority to increase the debt limit when the authorization is accompanied by a plan to put debt on a declining path as a share of Gross Domestic Product (GDP).
3) Suspending the statutory limit on debt if long-term fiscal targets are met.

Incorporating the debt limit into Congress’s fiscal decision making

4) Automatically increasing the debt limit upon passage of a budget resolution.
5) Requiring reconciliation instructions to increase the debt limit to accommodate debt levels in the budget resolution.
6) Requiring legislation with significant net costs to include an increase in the debt limit.

Applying the debt limit to more economically meaningful measures

7) Modifying the debt limit to apply only to debt held by the public
8) Indexing the debt limit to GDP growth, effectively capping debt-to-GDP.

Replacing the debt limit with a limit on future obligations

9) Applying the debt limit to future liabilities and unfunded obligations.
10) Replacing the debt limit with a “debt cap.”

These suggestions would improve upon the status quo by making the debt limit a more meaningful measure of our ability to deal with our debt, increasing accountability, creating incentives for policymakers to enact fiscally responsible legislation before debt is incurred, and curbing irresponsible brinksmanship in debt limit debates.

As policymakers confront the debt limit in the near future, we hope they consider these options to make the process less painful and more productive. As our paper concludes:

There are numerous options for reforming the debt limit which reduce the risk of a default while providing both carrots and sticks to encourage fiscal responsibility and providing greater accountability in the budget process. Reforms of the debt limit could also make the debt limit a more meaningful measure of our fiscal condition and create a greater link between the debt limit and the policy decisions affecting the debt.

Click here to read more about the Better Budget Process Initiative. 

Click here for more information on the debt limit.

Click here to read, "Improving the Debt Limit."