Committee for a Responsible Federal Budget
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Looming Debt Limit Debate Offers Opportunity for Meaningful Reform

Apr 7, 2017 | Budget Process

The debt limit was quietly reinstated on March 16. The budget deal in November 2015 suspended the debt limit through March 15, 2017, and reinstated the limit the day after at the current level of gross debt held by the government. Since Congress has delayed raising the debt limit, the Treasury Department is using special accounting tools called “extraordinary measures” in order to avoid default.

Legislation increasing the debt limit is often highly contentious, as neither party wants to be perceived as “increasing the debt.” In reality, the debt limit is simply a cap on the amount of money the government can borrow. By raising the debt limit, Congress allows the federal government to cover the government’s current obligations rather than increasing the debt.

Congress will endanger the economy if it does not pass legislation to increase the debt limit. The Treasury Department can use “extraordinary measures” to borrow additional funds without hitting the debt limit and extend the time lawmakers have before they must raise the debt limit. However, the Congressional Budget Office projects that these extraordinary measures will last only until the fall of 2017. The Bipartisan Policy Center projects that these measures will last until October or November 2017.

Previous debt limit debates have led to legislation that put in place processes or policies to reduce the deficit. While our current debt limit reflects much of the same dysfunction of our broken budget process, future debt limit legislation could bring with it the opportunity to reform the debt limit in a way that puts the debt on a downward path and improves fiscal discipline.

Senate Budget Committee Chairman Mike Enzi and former House Budget Committee Chairman Tom Price have both included debt limit reforms in their larger budget process reform proposals. While these two proposals have important differences, they both call for replacing the nominal debt limit, which is based on a dollar amount, with a targeted limit on debt as a share of GDP.

This significant change in calculating the debt limit brings with it two important effects. First, it uses a measure that better contextualizes the size of debt by comparing it to the size of the economy. Second, this modification forces Congress to take action in advance and keep the debt within its targets.

While both bills share this common reform, the enforcement mechanisms for these targets differ significantly. In Chairman Enzi’s plan, Congress establishes debt-to-GDP targets at the beginning of the federal budget process. Once adopted, these targets are binding on the Congressional and President’s budgets unless modified by a two-thirds majority. Under Price’s plan, if the debt-to-GDP ratio exceeds the target, then Congress would need to enact new targets into law before the Secretary of Treasury could borrow additional funds.

We have proposed similar debt limit reforms to reduce the debt-to-GDP ratio as part of our Better Budget Process Initiative. These recommendations include:

Linking changes in the debt limit to achieving responsible fiscal targets:

  • Providing presidential authority to increase the debt limit if fiscal targets are met.
  • 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 GDP.
  • Suspending the statutory limit on debt if long-term fiscal targets are met.

Automatically increasing the debt limit upon passage of a budget resolution:

  • Requiring reconciliation instructions to increase the debt limit to accommodate debt levels in the budget resolution.
  • Requiring legislation with significant net costs to include an increase in the debt limit.

Applying the debt limit to more economically meaningful measures:

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

Replacing the debt limit with a limit on future obligations:

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

These reforms align debt limit enforcement with desired debt targets, constrain Congress and the President by establishing a target that puts the debt on a downward trajectory, and base the debt limit on a measure that more meaningfully reflects the government’s ability to handle its debt. Reforming the debt limit along these lines could help force the President and Congress to confront the long-term fiscal consequences of the policies they enact.

As they confront the debt limit, we hope lawmakers pursue fiscally responsible reforms by introducing a long-term perspective into the government’s management of debt, reducing brinkmanship, and lowering the debt-to-GDP ratio.

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."