As the Treasury Department reminded us on Wednesday, the federal government will likely reach the debt limit sometime between April 5 and May 31. Hitting the debt ceiling provides a rare moment when Congress and the President are forced to take a stand on a most fundamental and difficult issue: whether the federal government will continue to deficit spend.
A central question in the debt limit debate is whether the government would risk defaulting on its outstanding debt. Contrary to disappointing Administration inferences, the answer is that there is no such risk. But to end once and for all any notion that the U.S. would default on its debt, Congress can pursue legislation to make the payment of interest on the debt the top priority at all times. Congressman Tom McClintock (R–CA) and Senator Pat Toomey (R–PA) have introduced legislation that does just that.
The debt limit, currently at $14.294 trillion, establishes in statute how much debt the government is allowed to issue. With a deficit for 2010 of $1.3 trillion and a projected deficit for 2011 of $1.5 trillion, the government is issuing new debt at a prodigious pace, and the ceiling is fast approaching.
In dealing with the debt limit issue—whether and how much to increase the limit and whether other budget and fiscal policies are tacked on to the bill—Presidents are typically at a tactical disadvantage. In the past, Congress typically decided to pass debt limit legislation, though often at the last minute—leaving the President little choice but to sign whatever he could get.
Treasury Secretary Tim Geithner sent Congress a letter on January 6 suggesting the debt limit could be reached as early as March 31. Geithner’s letter referred to the “consequences of default by the United States.”
The primary job of the Treasury Secretary is to communicate accurately and clearly with credit markets that buy and hold U.S. government debt. Geithner failed. As noted elsewhere, there is no immediate problem; Congress has time to consider its options and should disregard the Administration’s false urgency. This was underscored by yesterday’s Treasury announcement suggesting the debt limit may not be reached until two months after the date cited in the Geithner letter.
Worse than the false sense of urgency, Geithner clearly implied that if the debt limit is reached, then the United States government may be forced to default on the debt it has issued to finance past deficits. This is untrue.
The Secretary then followed the old adage of “in for a penny, in for a pound” in correspondence to Senator Toomey, saying that his proposal is “unworkable” and would lead to the “first-ever failure” of the U.S. to meet its commitments. The federal government has a commitment to pay its bills, and it would certainly continue to do so. Especially interest on the debt. And if the Secretary needs additional legislative clarity on this point, no doubt the Congress would be happy to provide it. But what Geithner’s comments really reveal is the Administration’s underlying tension between partisan politics and prudent financial management. Geithner has evidently eschewed the latter in favor of high stakes brinksmanship.
Very simply, once the debt limit is reached, spending is limited by revenues and would be guided by prioritization of the government’s obligations. Absent further guidance from the Congress, how the President would prioritize its obligations is a matter of some conjecture. Certainly, the vast inflows of receipts would be more than sufficient to cover net interest costs. Receipts in 2011 are projected to exceed $2.2 trillion while net interest is projected to be $225 billion, about 10 percent of total revenues. Receipts have always exceeded net interest expense, which is a key reason the federal government has never defaulted on its outstanding debt. Whether Treasury is required by law to make the payment of interest expense the top priority is an open question, but there can be little doubt that a prudent Treasury would do so.
To reassure credit markets, to eliminate the last shred of doubt that the U.S. government will never default on the debt it has sold to finance its spending, Congress can clearly establish through legislation that net interest will always receive first claim on incoming receipts. The Toomey–McClintock bill would accomplish that in a workable way. Congress could also go further, for example, and identify for the President all other top priority spending items after net interest, such as for national security, rather than leave such prioritizing decisions to a President acting without statutory guidance.