Congress holds the purse strings.
by Pete Fasciano, Executive Director 05/14/2023
This week (Monday 11 AM, 2 PM, 6 PM) we discuss the U.S. Federal Budget on our radio program ‘More Perfect Union’. Dr. Michael Walker-Jones sent a link to this overview by David Wessel of The Brookings Institute. It’s worth a read.
When the federal government runs a deficit by spending more than it collects in revenue it borrows money to cover the difference by issuing IOUs as U.S. Treasury securities. The debt ceiling is a limit set by Congress on the amount the Treasury can borrow (Currently $31.4 trillion). The Treasury hit that ceiling in January and has been taking what are known as “extraordinary measures” to keep paying the bills. But it will run out of maneuvering room sometime in the next several months, perhaps as early as June, unless Congress acts.
There have been four Federal shutdowns where operations were affected for more than one business day. In 1995-1996, President Clinton and the Republican Congress were unable to agree on spending levels, so the government shut down twice, for a total of 26 days. In 2013, a standoff over funding for the Affordable Care Act resulted in a 16-day shutdown. And in December 2018 and January 2019, a dispute over border wall funding led to a shutdown that lasted 35 days.
Because tax revenues aren’t sufficient to cover all federal spending, the federal government borrows a lot—an average of more than $7 billion per business day. Raising the debt ceiling doesn’t increase federal spending beyond what already has been approved by Congress; it simply allows the government to pay for purchases and obligations it already has made. Because Congress in the past has always lifted the debt ceiling before the Treasury has run out of money, no one knows for sure what will happen if Congress doesn’t act this time—what the Treasury and the Federal Reserve will do, and how financial markets will react. Failure to make timely interest and principal payments on U.S. Treasury securities, regarded as the safest financial asset in the world, would be an unprecedented default and, among other things, would call into question the credibility of the U.S. government’s promises and probably raise the interest rate that investors demand to hold U.S. Treasury debt in the future.
In contrast to government shutdowns, a failure to raise the debt ceiling threatens not only the spending subject to annual appropriation by Congress, but all federal spending—including interest on the debt and Social Security, Medicare, and other government benefits. Federal employees can continue working—there is no need for agencies to decide which services are essential and which are not—but their paychecks may be delayed.
We know from transcripts of Federal Reserve meetings that when this issue arose in 2011, the Obama Treasury was planning to make all interest and principal payments and to delay paying all its other bills—including government benefits.
The Biden Treasury hasn’t said what it plans to do if Congress doesn’t raise the debt ceiling in time. It is, however, likely to make interest and principal payments on Treasury debt. Whether and how it will prioritize other payments is unclear— but someone will not get paid on time; there simply won’t be enough cash to meet every obligation.
What is the connection between raising the debt ceiling and reducing the federal deficit? Legally, there is no connection, though sometimes the two issues occur close together if the Treasury bumps up against the debt ceiling close to the end of the federal fiscal year on September 30, the deadline for approving appropriations bills (even if only temporary ones).
Still, members of Congress have used the imperative of raising the debt ceiling as leverage in negotiations in Congress and with the White House over appropriation bills and, sometimes, over broader tax and spending policies. (This maneuver usually is used by members of Congress from a party other than the president’s party.) In 2011, for instance, President Obama and the Republican majority in the House reached a multi-part agreement—the Budget Control Act—just a couple of days before the Treasury ran out of cash. Among other things, it put caps on total appropriated spending and created a special congressional committee to craft a plan to reduce future deficits. The committee failed to come to agreement, triggering a series of automatic spending cuts.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donors.
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IMHO:
This too shall pass. Odds are that it will be resolved timely. Neither political party wants to repeat the traumas of past shutdowns. Over the decades both parties have raised the debt limit as necessary.
Thanks for listening to 102.9 wfpr●fm.
And – as always – thanks for watching.
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| Franklin TV: The Federal Budget & The Debt Ceiling |
