U.S. Hits Debt Ceiling, but Default Is Completely Avoidable

Romina Boccia /

Now that the U.S. hit its $14.3 trillion debt ceiling on May 16 and the doomsday predictions of the financial apocalypse that was going to tank the economy failed to materialize, the question remains: How should Congress respond?

Congress has until August 2 to respond. It could raise the debt ceiling without any other policy changes or keep the existing debt limit and force the Treasury Department to make substantial reductions in non-interest spending. It could also raise the debt limit but make substantial, immediate spending reductions accompanied by tough budget reforms. No matter what course Congress decides on, it is vital that Congress and the President acknowledge that the root of our debt problem lies in out-of-control government spending and take the steps necessary to get the budget under control.

Although President Obama demonstrates over and over again that he prefers rhetoric over leadership on the difficult changes needed to control the U.S. debt, as David Addington writes:

[Congress] must reach agreement to accomplish three things to put the country on a path to financial responsibility: (1) cut current spending, (2) restrict future spending, and (3) fix the budget process. Relief from the debt limit makes sense only if that relief is an integral part of a plan to drive down spending and borrowing so that the country lives within its means.

As this chart shows, under President Obama’s budget proposal, the debt held by the public would surge—and with it interest payments. This outcome would be devastating for the U.S. economy, but burdening American taxpayers and businesses with crippling tax hikes would be no better. Congress should reverse course now to lead the U.S. back on a path toward sustainable economic growth and prosperity.

As media-hungry pundits join the fear-mongering, calling the American public and foreign investors to question the creditworthiness of the U.S., Congress should take steps to calm down investors holding U.S. government debt. Disappointingly, President Obama has chosen to further agitate any fears of default, implying that raising the debt limit is absolutely necessary and that Members of Congress who demand significant spending reductions risk bringing about another recession. At a recent CBS town hall meeting, the President warned:

If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOUs, it could unravel the entire financial system.… We could have a worse recession than we already had. A worse financial crisis than we already had.

Rather than join in the camp of fear-mongers, there is another way that Congress could show leadership: by assuring our bondholders that meeting interest obligations is a first priority. As Heritage expert J. D. Foster suggests in “Congress Has Time and Options on Debt Limit,”

Legislation could clearly indicate that net interest on public debt would receive the first claim on income tax receipts, thus eliminating any remaining shred of substance from the question of default.

While the risk of default is not as imminent as President Obama makes it out to be, the clock is nevertheless ticking to rein in the growing deficit, which is poised blow up the public debt to 100 percent of GDP over the course of this decade. Most importantly, Congress must tackle the escalating costs of servicing Social Security, Medicare, and Medicaid in order to avoid a crisis similar to the one experienced in Greece.

This glum outlook need not materialize, though. The Heritage Foundation recently launched Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, which lays out the necessary reforms to put the U.S. on a trajectory toward sustainable growth and economic prosperity.

The plan proposes solutions to our entitlement crisis that would strengthen Social Security by returning it to its original purpose—guaranteeing that older Americans don’t fall into poverty—and reforming Medicare and Medicaid to improve access to quality care while controlling costs through market-based incentives. These reforms would ensure both the longevity and fiscal sustainability of these programs.

The debt-limit debate ensuing over the next few months puts Congress in a unique position to rein in out-of-control federal spending and budget deficits. Congress should embrace this opportunity to its fullest extent by doing what’s necessary and right: implement immediate spending reductions, future spending reductions, and significant reforms to reduce government spending and get the federal government’s debt under control.

Co-Authored by Alison Fraser