It surprised few that the debt ceiling is a topic of discussion again, although the way this is unfolding may actually be a surprise. The leaders of the House of Representatives and the Senate both seem convinced there will be an approval of a debt ceiling increase before the end of the government’s fiscal year. For the time being markets seem to largely believe this.
It is probably worth mentioning that the President’s suggestion that he would allow a government shutdown to occur is actually separate from the debt ceiling debate, for now. Those comments speak more to the notion of refusing to sign off on the budget and continuing or concurrent resolutions the Congress would give to him as spending bills. If, however, and I have seen this suggested, the Congress gives him some type of spending bill that also includes an increase of the debt ceiling, then I think you have a different story on your hands.
The spending and taxing decisions of the Congress and the debt ceiling are set independently of each other, which makes very little sense. The repeal of the so-called Gephardt rule in 1995 made this the case. That rule basically said if Congress passed a budget that implied an increase in the debt ceiling when a budget passed that would require a debt ceiling increase. All that did was explicitly make the debt ceiling irrelevant, which might actually be preferable to the current state of affairs, where we have a protracted argument about it and nothing changes. What is the purpose of the debt ceiling? I would assume most would suggest it is some kind of limit on the amount of debt the U.S. government can take on. Okay. However there is no connection between it and the spending decisions taken on by the Congress. In a 2011 report the U.S. Government Accountability Office described the debt limit as follows,
The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.
The debt ceiling breach and the exhausting of extraordinary measures by the Treasury is a situation of U.S. default on debt, which is not a scenario to even think about, in my opinion. From a policy perspective, given the ineffectiveness of the debt ceiling we should be exploring other options, and the GAO report lists some. I think we should consider a balanced budget amendment, for example. That is likely too fiscally binding for many and it therefore is a non-starter. You could make it the case that the budget needs to be balanced over a window of time, say seven years, with the ability to temporarily suspend the balanced budget in times of emergency. I will leave emergency undefined for right now, but we could probably arrive at some type of working definition.
So let’s look at the picture of the debt and the debt ceiling to try and further clarify the situation. I am showing post 1976 for the purposes of clarity. In 1976 the U.S. government fiscal year switched from July 1 to June 30, to the current version of October 1 to September 30. They added a “transitional quarter” in 1976 as the government moved from the June 30 end of one fiscal year to the October 1 start of the next.
The amounts for 2017 and beyond are estimated for debt. I take away two things from this graph. First, while the U.S. has come close, we have not surpassed the debt limit, and most years we end close to the debt ceiling. Second, the debt ceiling does not appear to be a real impediment to ever increasing levels of debt. This should then lead us to my earlier question, what is the point of the debt ceiling?
Fiscal policy process in the United States is in need of a significant overhaul but the debt ceiling does not appear to be a meaningful part of that, more for show and theater than actual change.