The Concord Coalition Calls for Reform of the Debt Limit
With the Treasury Department undertaking extraordinary measures to avoid a potential default, the Concord Coalition is calling for both raising and reforming the debt ceiling. In an issue brief, It’s Time To Raise and Reform the Statutory Debt Limit, Concord notes the weakness of the debt limit as a tool for fiscal discipline, as it only comes into play after decisions on spending and taxes have already been made, and it carries the dangerous possibility that the U.S. could be unable to pay its obligations in full or default on the debt.
There should be no delay in voting to increase the debt limit. Despite its name, the debt limit has never proven to be an effective means of controlling debt. And yet, failure to raise the debt limit risks serious long-term harm to the nation’s creditworthiness. The main flaw is that debt limit debates commonly take place long after decisions have been made on the policies that produce the debt. This disconnect between inputs and results gives the debt limit an arbitrary nature, which is made worse by the fact that it has never been tied to an economically significant target such as the debt-to-GDP ratio.
Current circumstances require a prompt increase in the debt limit. Reforms should then be enacted as part of a fiscal sustainability plan that tie future increases to policy decisions or economic circumstances at the time they occur.
According to Concord, other budgetary restraints, such as pay-as-you-go (PAYGO) rules and statutory spending caps, have been much more effective in enforcing fiscal restraint compared to the debt limit and do not have the same potential to damage the economy.
With the debt limit crisis out of the way, the Concord Coalition says that lawmakers should immediately begin to develop a comprehensive debt reduction plan that could replace the sequester and get our fiscal house in order:
With an unnecessary crisis over the debt limit averted, Congress and the President should promptly develop a comprehensive, specific and credible plan to place our nation on a sustainable fiscal path. Lawmakers should consider the entire federal budget to be on the table -- including entitlement programs, domestic discretionary spending, defense spending, and revenues.
The immediate fiscal goal should be to stabilize the debt-to-GDP ratio within the 10-year budget window, if not sooner. No procedural mechanism to control the debt will work if the policies don’t add up. And until an overall framework is agreed upon, it is likely that policy decisions will continue to be driven by short-term crisis management rather than responsible strategic planning. Without such a framework, economic uncertainty will continue, public frustration with the political process will grow and the debt burden hanging over future generations will remain as our legacy.
Breaching the debt limit would likely lead to a downgrade from credit agencies and dramatically shake confidence in the state of U.S. finances. Prioritizing payments is also not an easy task given the sheer number of transactions that the Treasury Department has to manage. Describing the consequences of hitting the debt ceiling, Treasury Secretary Timothy Geithner today sent a letter to Congressional leaders urging immediate action to raise the debt ceiling and avoid potential default.
The last couple of weeks people have been focused on possible gimmicks to avoid the breaching the debt limit, but this conversation is largely distracting. Instead, as CRFB President Maya MacGuineas wrote today, Congress and the President should focus their energy on making a deal to raise the ceiling as soon as possible and enact a fiscal consolidation package that would replace the blunt, across-the-board sequestration.