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Wednesday, May 29, 2013

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

Mindy R. Levit, Coordinator
Analyst in Public Finance

Clinton T. Brass
Specialist 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 (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 government’s statutory debt limit is currently suspended through May 18, 2013.

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 which, 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.

The debt limit was permanently increased on August 2, 2011, as part of the Budget Control Act of 2011 (BCA; P.L. 112-25). The BCA also provided for two additional debt limit increases, which occurred in September 2011 and January 2012. On December 26, 2012, then-Treasury Secretary Timothy Geithner sent a letter to Congress stating that the debt limit, the last increase provided for under the BCA, would be reached on December 31, 2012. Treasury estimated that the use of extraordinary measures would provide additional headroom under the debt limit until early 2013. On February 4, 2013, the statutory debt limit was suspended through May 18, 2013, as part of the No Budget, No Pay Act of 2013 (P.L. 113-3).

After the debt limit suspension period ends, Treasury has stated that the extraordinary measures used during prior debt limit impasses will be fully available. Budget outlays and revenue collections over the last several months of the fiscal year, along with the funds contained in the extraordinary measures, will affect the timing of when the debt limit is reached. Treasury Secretary Jacob Lew stated that the extraordinary measures will provide Treasury with sufficient cash flow though at least Labor Day. Some economists have estimated that the use of the extraordinary measures will allow Treasury to continue borrowing until as late as November 2013. It is possible that the debate over the debt limit could coincide with the start of FY2014 (October 1, 2013) and the negotiations over FY2014 appropriations bills. 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.

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 is often complicated, hindered by policy disagreements, and subject to delay.

Date of Report: May 15, 2013
Number of Pages: 30
Order Number: R41633
Price: $29.95

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