January 12, 2011

January 12, 2011 | Factsheet on National Debt, Economy

The Debt Ceiling: Time, Options, and Action

Time for Deliberation

  • Congress Has Time: Gross federal debt has reached $14 trillion. Ongoing deficit spending (projected at $1.4 trillion for 2011) means the ceiling of $14.29 trillion will initially be reached around mid-March. Treasury’s traditional financial toolbox and revenue surges in April and June should delay the final moment of reckoning to mid-May and possibly as late as July.
  • Full Consideration and Deliberation: Members of Congress have time for full consideration and deliberation before making a decision on the debt limit and necessary spending cuts.
  • No Risk of Default: Keeping the debt ceiling at its current level would not, in and of itself, risk default on the debt. Federal taxes will still be collected by the Treasury from which interest and principal on the debt should be paid. Since default is not immediately a realistic scenario, the federal government’s credit-worthiness would not be damaged.

Obama's Budget Would Send Federal Debt to Levels Not Seen Since World War II

Congress Has Many Options

  • Time to Demonstrate Seriousness: Congress has many options regarding the debt limit, and it should not unduly rush into a decision as if there is some imminent crisis pending. Instead, Members should promptly have a full discussion of the level of debt they want to set and begin immediate, substantial spending cuts to demonstrate the seriousness with which they take the nation’s fiscal problems. These should be followed by crucial additional changes such as hard spending caps and entitlement reforms that would return the nation to fiscal sanity and keep it there.
  • Immediate Spending Reductions a Necessity: Any increase in the debt ceiling should be accompanied by immediate, substantial spending reductions along with strong new rules such as hard spending caps to require continued, sharp spending reduction in future years—thus putting the budget squarely on a path to fiscal responsibility through lower spending, taxes, and borrowing. Increases without these steps are not acceptable.
  • One Option: One option Congress could also consider would be to provide only short-term increases to the debt ceiling in order to provide additional opportunities to force critical spending cuts through the legislative process during the course of the year.

Absent Action …

  • Without a Debt Ceiling Increase, Spending Must Be Cut Now: Holding the current debt ceiling in place would require eliminating all deficit spending. For the remainder of the fiscal year, this would entail immediate spending cuts of approximately $150 billion per month; the 2012 budget would have to eliminate the projected $1 trillion deficit. These cuts would best be established through prompt legislation.
  • Choices Need to Be Made: Absent legislative direction, once the debt limit is finally reached, the Administration would be required to pay the government’s bills without additional borrowing. Some payments would likely occur normally without reduction, such as interest on the debt and programs with dedicated revenues like Social Security. However, the Administration would need to determine which others would be subject to cuts and or delays.

For more information, please visit: http://heritage.org.

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