Deep Dive: The Debt Limit

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Deep Dive: The Debt Limit

President Donald Trump, House Speaker Nancy Pelosi, and Senate Majority Leader Mitch McConnell have reached a deal on a two-year budget proposal that increases spending and suspends the federal debt limit for two years. Within the past decade, there have been bitter political fights over raising the debt limit. Now, however, there is bipartisan agreement to suspend it altogether.

 

What Is the Debt Limit?

 

Article I, Section 8, of the Constitution gives Congress the power “To borrow Money on the credit of the United States.” Using this authority, Congress sets a limit on how much the federal government can borrow. This is called the “debt limit.”

 

Federal spending includes both discretionary spending through the appropriations process and spending that has been authorized by law to happen automatically through federal entitlement programs. If this federal spending exceeds federal revenue, then there is a deficit and the government must borrow money to finance this spending. The debt limit sets a cap on how much borrowing can occur. That number is whatever the members of the House of Representatives and the President agree it will be.

 

The debt limit covers several different types of government debt issuance:

  • Debt to finance budget deficits
  • Debt to pay for intergovernmental borrowing
  • Debt incurred by federal lending, such as student loans

 

When federal borrowing is approaching the debt limit, Congress has four options:

  • Vote to raise the debt limit
  • Keep the current debt limit in place and not allow future borrowing
  • Keep the current debt limit in place but take steps to postpone the limit from being breached
  • Vote to suspend or eliminate the debt limit

 

Under “extraordinary circumstances,” the Treasury Secretary can suspend the debt limit. This occurred in March when Secretary Steven Mnuchin suspended the debt limit to allow time for the president and Congress to negotiate a new one.

 

Controversy Surrounding Raising the Debt Limit

 

Congressional action to increase the debt limit was relatively uncontroversial until 2011. In that year, congressional Republicans refused to increase the debt limit without budget concessions from President Obama. Two days before the debt limit would expire, the president and Congress agreed to a package of items designed to control future spending in return for a debt limit increase.

 

In 2013, there was another fight between Congress and the president over the debt limit. Republicans wanted to defund the Affordable Care Act, or Obamacare, in return for an increase in the debt limit. This issue became tied up with the yearly government funding legislation, and a resolution occurred that raised the debt limit and ended a government shutdown.

 

Both of these disputes over the debt limit increase caused significant alarm in some quarters. Observers pointed out that that annual spending bills and entitlement programs had authorized spending that, in the absence of enough revenue, must be paid for by borrowing. Failing to raise the debt limit would impair the federal government’s ability to borrow money to engage in the activities that members of Congress and the president had already agreed to do. This could lead to the U.S. being in default, or in lenders penalizing the federal government with less favorable terms for borrowing.

 

The Future of the Debt Limit

 

Under the current deal reached by the president and congressional leaders, there would be a two-year suspension of the debt limit. This follows a one-year suspension of the debt limit that expired earlier this year. A suspension does not raise the debt limit by a set amount; instead, it allows the limit to lapse for a defined period of time, after which the debt limit is re-imposed at a level that takes into account the borrowing that occurred in the interim.

 

While there was controversy over raising the debt limit earlier in the decade, this may signal that there is little political will to have such a fight in the future. For two years, at least, there will be no disputes between Congress and the president over the debt limit, which pushes the issue past the 2020 election.

 

What Does This Mean for You?

 

According to some observers, past fights over the debt limit have led to volatile financial markets and reduced economic growth. If these analysts are correct, this means that removing further uncertainty about the debt limit will remove a barrier to economic growth. However, not all experts agree that the economy suffers due to disagreements about the debt limit.

 

However, members of Congress used agreeing to the 2011 debt limit increase as a way to enact a measure of budget discipline. Since the debt limit increase is seen as one of the few “must pass” pieces of legislation, using it as leverage is a way to force votes on other issues. For individuals concerned about budget deficits and federal spending, a two-year deal on the debt limit means one less method to enforce a measure of fiscal discipline.

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