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Tuesday, February 15, 2011

Reaching the Debt Limit: Background and Potential Effects on Government Operations

Mindy R. Levit, Coordinator
Analyst in Public Finance

Clinton T. Brass
Analyst in Government Organization and Management

Thomas J. Nicola
Legislative Attorney

Dawn Nuschler
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

The gross federal debt, which represents the federal government’s total outstanding debt, consists of two types of debt: (1) debt held by the public and (2) debt held in government accounts, also known as intragovernmental debt. Federal government borrowing increases for two primary reasons: (1) budget deficits and (2) investments of any federal government account surpluses in Treasury securities, as required by law. Nearly all of this debt is subject to the statutory limit. The federal debt limit currently stands at $14,294 billion. Following current policy, Treasury has estimated that the debt limit will be reached in spring 2011.

Treasury has yet to face a situation in which it was unable to pay its obligations as a result of reaching the debt limit. In the past, the debt limit has always been raised before the debt reached the limit. However, on several occasions Treasury took extraordinary actions to avoid reaching the limit and, as a result, affected the operations of certain programs. If the Secretary of the Treasury determines that the issuance of obligations of the United States may not be made without exceeding the public debt limit, a debt issuance suspension period can be authorized. This gives Treasury the authority to utilize nontraditional methods to finance obligations.

Treasury Secretary Geithner issued a letter to Congress on January 6, 2011, stating that Treasury has an ability to delay for several weeks the date by which the debt limit would be reached by taking certain actions. However, if these financing options are also exhausted and Treasury is no longer able to pay the bills, serious financial and economic implications could result that could have a lasting impact on federal programs and the U.S.’s ability to borrow in the future. According to Treasury, if the debt limit is not raised after that point, payment of other obligations and benefits would be discontinued, limited, or adversely affected. The letter also provided Treasury’s views on the consequences of a default by the United States on its debt obligations.

Under current estimates, the federal government will have to issue an additional $738 billion in debt above the current statutory limit to finance obligations for the remainder of FY2011. If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed. To put this into context, the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011(April through September 30, 2011) in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.

It is extremely difficult for Congress to effectively influence short-term fiscal and budgetary policy through action on legislation adjusting the debt limit. The need to raise (or lower) the limit during a session of Congress is driven by previous decisions regarding revenues and spending stemming from legislation enacted earlier in the session or in prior years. Nevertheless, the consideration of debt-limit legislation often is viewed as an opportunity to reexamine fiscal and budgetary policy. Consequently, House and Senate action on legislation adjusting the debt limit often is complicated, hindered by policy disagreements, and subject to delay. Which spending and revenue policies are enacted and how often Congress wishes to reconsider statutory debt limit legislation typically affects the level at which the debt limit is set.

Date of Report: February 11, 2011
Number of Pages: 22
Order Number: R41633
Price: $29.95

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