GAO: 2013 Debt Limit Showdown Shows Need to Consider Reform
Last week, the Government Accountability Office (GAO) released a new report to Congress on the debt limit, showing that the failure to raise the debt limit in a timely fashion in 2013 had costs for the federal government. The report also contains proposals for reforming the debt limit. The Better Budget Process Initiative (BBPI) released a paper this spring with proposals for debt limit reform that mirror and answer some of GAO's options and concerns.
The debt limit technically returned in March of this year, though “extraordinary measures” that the Treasury can take will delay the ultimate deadline until late fall. As possibly the most disruptive fiscal speed bump facing the country, it’s important to look into ways that the debt limit can be used to bring attention to our unsustainable debt path while limiting unproductive brinksmanship. The GAO report found that the delay in passing an increase in the debt ceiling during the 2013 government shutdown very much concerned investors. These concerns translated into some financial firms being unwilling to hold Treasuries with expirations immediately after the end of the Treasury department’s ability to continue “extraordinary measures” (we noted an increase in the one-month Treasury yield at the time). GAO found that this increased borrowing costs for the government by between $38 million and just over $70 million. GAO’s communications with investors indicate those investors are prepared to take similar measures if policymakers drag their feet again this fall.
In addition to the analysis on the increased costs, GAO provided recommendations of policy changes to reduce the damage from a future debt limit debate. The proposals include: linking action on the debt limit to the budget resolution, providing the administration with the authority to increase the debt limit subject to congressional disapproval, and delegating broad authority to the administration to borrow as necessary. In March, our BBPI paper “Improving The Debt Limit” put forward several detailed proposals that were consistent with broad recommendations in the GAO report or were variations on the GAO recommendations.
GAO Option One – Link Action on the Debt Limit to the Budget Resolution
Linking the debt limit to the budget resolution creates a clear relationship between the debt limit and the revenue and spending targets in the budget resolution and addresses the debt limit well in advance of the deadline. In "Improving The Debt Limit", we had three specific suggestions for how this sort of proposal could be done: an automatic spin-off vote to increase the limit through a revived Gephardt rule, an automatic vote on a separate debt limit increase upon passage of budget resolution, or a requirement that budget resolutions have reconciliation instructions for a debt limit increase. A concern that GAO raised with tying the debt limit to the budget resolution is that a budget resolution doesn’t necessarily account for legislative or economic changes not in the resolution. We address this point in our BBPI paper by proposing to require that legislation increasing debt above the budget resolution include a corresponding increase in debt limit.
GAO Option Two – Provide the Administration with the Authority to Increase the Debt Limit Subject to a Congressional Motion of Disapproval
This method has previously been used in 2011 to increase the debt limit, letting Congress still have a say on the debt limit but also likely preventing problems in the financial markets from brinksmanship, since it would need to muster a two-thirds majority to override the likely veto. However, it would most likely disallow Congress from being able to tie fiscal decisions to the debt limit. In "Improving The Debt Limit," we suggest that this power only be valid if certain conditions are met such as debt being on a downward path or below certain measures of debt to GDP.
GAO Option Three – Delegating Broad Authority to the Administration to Borrow as Necessary to Fund Enacted Laws
The final proposal essentially removes the debt limit from Congressional control, which would be consistent with many other countries that have no debt limit. This approach would remove any financial market dangers of hitting the limit and allows the Administration to respond to changing conditions. Of course, it would also remove the debt limit as a tool to rein in increasing debt.
These aren't the only three options available to reform the debt limit. All of the options included in the BBPI paper are:
Link changes in the debt limit to achieving responsible fiscal targets
1) Presidential authority to increase the debt limit if fiscal targets are met
2) Presidential authority to increase the debt limit if accompanied by a plan to put debt on a declining path as a share of GDP
3) Suspend the debt limit automatically if fiscal targets are met
Incorporate the debt limit into Congress’s fiscal decision making
4) Automatically increase the debt limit upon passage of budget resolution
5) Require reconciliation instructions to increase the debt limit to accommodate debt levels in the budget resolution
6) Require legislation with significant net costs to include an increase in the debt limit
Apply the debt limit to more economically meaningful measures
7) Subject debt held by the public instead of gross debt to the debt limit
8) Index the debt limit to GDP growth, effectively capping debt-to-GDP
Replace the debt limit with a limit on future obligations
9) Apply the debt limit to future liabilities and unfunded obligations
10) Replace the debt limit with a “debt cap”
More detail on these proposals can be found here.
For more on the BBPI’s work on the debt limit and other changes to the budget process read here.