Reaching The Debt Limit Background And Potential Effects On Government Operations

This report examines the possibility of the federal government reaching its statutory debt limit and not raising it, with a particular focus on government operations. First, the report explains the nature of the federal government's debt, the processes associated with federal borrowing, and historical events that may influence prospective actions. It also includes an analysis of what could happen if the federal government may no longer issue debt, has exhausted alternative sources of cash, and, therefore, depends on incoming receipts or other sources of funds to provide any cash needed to liquidate federal obligations. Finally this report lays out considerations for increasing the debt limit under current policy and what impact fiscal policy could have on the debt limit going forward.

This report examines the possibility of the federal government reaching its statutory debt limit and not raising it, with a particular focus on government operations. First, the report explains the nature of the federal government's debt, the processes associated with federal borrowing, and historical events that may influence prospective actions. It also includes an analysis of what could happen if the federal government may no longer issue debt, has exhausted alternative sources of cash, and, therefore, depends on incoming receipts or other sources of funds to provide any cash needed to liquidate federal obligations.2 Finally, this report lays out considerations for increasing the debt limit under current policy and what impact fiscal policy could have on the debt limit going forward.

The gross federal debt, which represents the federal government's total outstanding debt, consists of (1) debt held by the public and (2) debt held in government accounts, also known as intragovernmental debt. Federal government borrowing increases for two primary reasons: (1) budget deficits and (2) investments of any federal government account surpluses in Treasury securities, as required by law. Nearly all of this debt is subject to the statutory limit. The federal government's statutory debt limit is currently suspended through February 7, 2014.

Contents: (1) Introduction: The Debt Limit and the Treasury; Why Have a Debt Limit?; (2) A Brief History of the Federal Debt Limit: Origins of the Federal Debt Limit; World War II and After; (3) The Debt Ceiling in the Last Decade: The Debt Limit Issue in 2002: Resolving the Debt Limit Issue in 2002; The Debt Limit Issue in 2003; The Debt Limit Issue in 2004; The Debt Limit Issue in 2005, 2006, and 2007; The Economic Slowdown and Federal Debt; Fiscal Policy Considerations; Raising the Debt Ceiling in 2008 and 2009; Revised Deficit Estimates; (4) Concluding Comments; (5) Further Reading. Charts and tables.

The gross federal debt, which represents the federal government's total outstanding debt, consists of debt held by the public and debt held in government accounts, also known as intragovernmental debt. Federal government borrowing increases for two primary reasons: (1) budget deficits and (2) investments of any federal government account surpluses in Treasury securities, as required by law. Nearly all of this debt is subject to the statutory limit. Treasury has yet to face a situation in which it was unable to pay its obligations as a result of reaching the debt limit. In the past, the debt limit has always been raised before the debt reached the limit. This book examines the possibility of the federal government reaching its statutory debt limit and not raising it, with a particular focus on government operations. First, the book explains the nature of the federal government's debt, the processes associated with federal borrowing, and historical events that may influence prospective actions. It also includes an analysis of what could happen if the federal government may no longer issue debt, has exhausted alternative sources of cash, and, therefore, depends on incoming receipts or other sources of funds to provide any cash needed to liquidate federal obligations. A discussion of the effects that prior debt limit impasses have had on the economy is also included. Finally, this book lays out considerations for increasing the debt limit under current policy and what impact fiscal policy could have on the debt limit going forward.

Since 1995, the statutory debt limit has been increased 12 times to its current level of $14.294 trillion. The Dept. of the Treasury (DoT) notified Congress that the current debt limit could be reached as early as April 5, 2011. Under current law debt subject to the limit will exceed $25 trillion in 2021. This report: (1) describes the actions that DoT traditionally takes to manage debt near the limit; (2) analyzes the effects that approaching the debt limit has had on the market for DoT securities; and (3) describes alternative mechanisms that would permit consideration of the link between policy decisions and the effect on debt when or before decisions are made. Charts and tables. This is a print on demand edition of an important, hard-to-find report.

This book examines the possibility of the federal government reaching its statutory debt limit and not raising it, with a particular focus on government operations. The nature of the federal government's debt is explained, as are the processes associated with federal borrowing, and historical events that may influence prospective actions. This book also includes an analysis of what could happen if the federal government may no longer issue debt, has exhausted alternative sources of cash, and, therefore, depends on incoming receipts or other sources of funds to provide any cash needed to liquidate federal obligations.

Total federal debt can increase in two ways. First, debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public. Second, debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. The sum of debt held by the public and debt held by government accounts is the total federal debt. Surpluses reduce debt held by the public, while deficits raise it. On August 2, 2011, President Obama signed the Budget Control Act of 2011 (BCA; S. 365; P.L. 112-25), after an extended debt limit episode. The federal debt had reached its legal limit on May 16, 2011, prompting Treasury Secretary Timothy Geithner to declare a debt issuance suspension period, allowing certain extraordinary measures to extend Treasury's borrowing capacity. The BCA included provisions aimed at deficit reduction and allowing the debt limit to rise between $2,100 billion and $2,400 billion in three stages, the latter two subject to congressional disapproval. Once the BCA was enacted, a presidential certification triggered a $400 billion increase, raising the debt limit to $14,694 billion. That certification also triggered a second $500 billion increase on September 22, 2011, as a disapproval measure (H.J.Res. 77) only passed the House. A January 12, 2012, presidential certification will trigger a third, $1.2 trillion, increase after 15 days unless a disapproval measure, which would be subject to veto, were enacted. On January 18, 2012, the House passed such a measure (H.J.Res. 98) on a 239-176 vote. Congress has always placed restrictions on federal debt. The form of debt restrictions, structured as amendments to the Second Liberty Bond Act of 1917, evolved into a general debt limit in 1939. Congress has voted to raise the debt limit 11 times since 2001, due to persistent deficits and additions to federal trust funds. Congress raised the limit in June 2002, and by December 2002 the U.S. Treasury asked Congress for another increase, which passed in May 2003. In June 2004, the U.S. Treasury asked for another debt limit increase and again in October 2004. A debt limit increase was enacted on November 19, 2004. In 2005, reconciliation instructions in the FY2006 budget resolution (H.Con.Res. 95) included a debt limit increase. After warnings from the U.S. Treasury, Congress passed an increase that the President signed on March 20. In 2007, Congress approved legislation (H.J.Res. 43) to raise the debt limit by $850 billion to $9,815 billion that the President signed September 29, 2007. The recent economic slowdown led to sharply higher deficits in recent years, which led to a series of debt limit increases. The Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law (P.L. 110-289) on July 30, 2008, included a debt limit increase. The Emergency Economic Stabilization Act of 2008 (H.R. 1424), signed into law on October 3 (P.L. 110-343), raised the debt limit again. The debt limit rose a third time in less than a year to $12,104 billion with the passage of the American Recovery and Reinvestment Act of 2009 on February 13, 2009 (ARRA; H.R. 1), which was signed into law on February 17, 2009 (P.L. 111-5). Following this measure, the debt limit was subsequently increased by $290 billion to $12,394 billion (P.L. 111-123) in a stand-alone debt limit bill on December 28, 2009, and by $1.9 trillion to $14,294 billion on February 12, 2010 (P.L. 111-139), as part of a package that also contained the Statutory Pay-As-You-Go Act of 2010.