September 1, 2015

September 1, 2015 | Commentary on

The debt limit is back — What now?

It's back. The debt limit returned on Monday, March 16. And at $18.1 trillion, debt subject to the limit is roughly $1 trillion higher than when Congress temporarily suspended the limit on borrowing last year.

The debt limit is the amount of debt that the Treasury may issue. In February 2014, the Treasury hit that limit: $17.2 trillion. When that happens, it serves as a wake-up call for elected officials. It tells them, in no uncertain terms, that fiscal policy is on the wrong path.

High and growing debt drags down economic growth. For individuals, this means fewer opportunities for jobs, higher salaries and other chances at the American Dream. High and growing debt also threatens the economy with higher taxes on younger, working generations. The resulting economic uncertainty can stifle investment.
Congress should control spending before raising the debt limit. But in recent years, Congress chose against even limiting the debt at all. Instead, Congress "suspended" the debt limit, thus waiving it altogether.

Essentially, lawmakers gave the Treasury a blank check to borrow as much as needed to finance all authorized government spending during the period of the suspension. With a debt limit suspension, Congress effectively abdicated its constitutional power to control the borrowing of the federal government.

But now the debt limit's back in effect. So how can the Treasury continue to finance deficit spending between now and when Congress addresses the debt limit issue?

While Congress debates how best to address the debt limit, the Treasury will rely on so-called "extraordinary measures" to continue deficit spending. These allow the Treasury to borrow from certain government funds that are exempt from the debt limit. These are effectively debt limit loopholes.

The Congressional Budget Office estimates that these extraordinary measures will allow the Treasury to meet all payments through October or November. The Treasury will be able to dip into the following accounts to pay for outstanding obligations, with each of the dollar figures representing approximate borrowing capacity:

  • Suspend payments to the Thrift Savings Plan G Fund: $191 Billion. The Thrift Savings Plan is the federal government’s version of a 401(k) for federal employees and members of Congress. Its G fund is invested exclusively in short-term U.S. Treasury securities. The Treasury may use funds in the G fund and hold interest payments due to it at the debt limit. Treasury must reimburse the G Fund with interest.
  • Suspend investments of the Exchange Stabilization Fund: $23 Billion. This fund primarily buys and sells foreign currency to promote stability and avoid undesirable exchange-rate movements. The Treasury can dip into this fund and need not repay any foregone interest.
  • Conduct various activities for the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund: $192 Billion. These funds pay benefits to retired or disabled employees of the federal government and the U.S. Postal Service. The Treasury may suspend the issuance of certain securities and non-benefit payments for a declared period of time, as well as redeem certain securities in advance. These funds must be paid back with interest.
  • Suspend the issuance of new State and Local Government Series Securities: No additional capacity. The Treasury will simply stop issuing these special-purpose securities that help state and local governments conform to certain tax rules.

These four measures allow the government to continue deficit spending until next fall when CBO projects that they will be exhausted.

In the meantime, Congress should face the source of the debt problem: growing spending. Entitlement programs are the greatest contributors to growing spending, and the root cause of growing debt.

The right solution would be for Congress to eliminate waste wherever possible and make commonsense reforms that modernize outdated entitlement programs. That's hard, but important work. Commonsense reforms will both modernize Medicare, Medicaid and Social Security and empower people to exercise more choice in spending their healthcare and retirement dollars.

Lawmakers should address the key drivers of spending growth to put the debt on a downward path — before raising the debt limit.

Boccia is the Heritage Foundation's Grover M. Hermann Research Fellow in Federal Budgetary Affairs and research manager of the Institute for Economic Freedom and Opportunity. Sargent is a research assistant at the Heritage Foundation.

About the Author

Romina Boccia Deputy Director, Thomas A. Roe Institute for Economic Policy Studies and Grover M. Hermann Research Fellow
Thomas A. Roe Institute for Economic Policy Studies

Michael Sargent Research Associate
Thomas A. Roe Institute for Economic Policy Studies

This piece originally appeared in The Hill