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Tuesday, January 15, 2013

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

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 $16,394 billion.

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, Treasury can make use of “extraordinary measures.” Some of these measures require the Treasury Secretary to authorize a debt issuance suspension period.

After a lengthy debate over the debt limit in the summer of 2011, the enactment of the Budget Control Act of 2011 (P.L. 112-25) on August 2, 2011, provided for an increase in the debt limit to its current level. Secretary Geithner has stated that the current debt limit was reached on December 31, 2012, and the use of extraordinary measures will provide additional headroom under the debt limit until February 28, 2013. After this point, the debt limit will be reached and Treasury will no longer be able to issue federal debt.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA; H.R. 8), which addressed many of the spending and revenue provisions associated with the “fiscal cliff.” Prior to the enactment of this legislation, the federal government would have had to issue an additional $402 billion in debt above the current statutory limit to finance all obligations for FY2013. However, because of the deficit increase under ATRA, the amount of debt that will have to be issued above the current statutory limit has increased by at least $329 billion, absent further legislative action to offset this amount. Therefore, in FY2013, roughly an additional $700 billion in debt above the current debt limit could be required to finance the obligations of the federal government. This provides an approximation of what would be required to cover the borrowing need for the remainder of FY2013 once the debt limit is reached. This does not address what would be required in FY2014 and beyond to avoid having to raise 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.

Date of Report: January 4, 2013
Number of Pages: 26
Order Number: R41633
Price: $29.95

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