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Tuesday, December 3, 2013

Reaching the Debt Limit: Background and Potential Effects on Government Operations - R41633

Mindy R. Levit
Coordinator, Specialist 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 intra-governmental 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 February 7, 2014.

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.

Since 2011, the debt limit has been increased through provisions of three pieces of legislation. The debt limit was 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 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). On May 19, 2013, the debt limit was reinstated at a level which accommodated borrowing incurred during the suspension period (February 4 to May 18, 2013). On October 17, 2013, the debt limit was suspended again through February 7, 2014, as part of the Continuing Appropriations Act, 2014 (P.L. 113-46). Between the enactment of each of these legislative measures, Treasury used extraordinary measures to continue financing obligations.

Budget outlays and revenue collections along with the funds contained in the extraordinary measures will affect the timing of when the debt limit is reached. If the debt limit is reached and Treasury is no longer able to issue federal debt, federal outlays 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: November 21, 2013
Number of Pages: 33
Order Number: R41633
Price: $29.95

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