What is the debt limit?
The debt limit, or debt ceiling, is a statutory limit on how much money the Treasury can borrow to pay the nation’s bills. Once that limit is reached, the Treasury cannot borrow new funds to pay for federal government expenditures that exceed the amount of incoming revenues. Indeed, incoming revenues are currently lower than previously incurred obligations. The government, in short, is currently running a fiscal deficit and must borrow funds to pay for it. This means that if the debt ceiling were reached and more borrowing were precluded, the nation would lack the funds needed to pay all its obligations, and some bills would go unpaid. This is called default. A default would have cataclysmic economic and policy consequences. While Treasury secretaries have routinely deployed a set of “extraordinary measures” to avoid default, these measures will soon be exhausted, and absent congressional action to raise or suspend the debt ceiling, the nation will soon be unable to fulfill its obligations.
Default would have disastrous consequences
Once all available extraordinary measures are exhausted, default would occur. This would have grave consequences. First, payments for some or many federal expenditures could go unpaid for part or all of the impasse. Affected payments and programs include interest on the national debt, Social Security, Medicare, income tax refunds, veterans’ benefits, defense, food safety, border security, air traffic control, Medicaid, the Supplemental Nutrition Assistance Program (SNAP), and thousands of other programs. Failure to make payments would delay receipt of critical benefits and services for millions of Americans.
Economist Mark Zandi notes that even a brief default would have catastrophic consequences:
Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn ensuing from a political impasse lasting even a few weeks would be comparable to that suffered during the global financial crisis. That means real GDP would decline almost 4% peak to trough, nearly 6 million jobs would be lost, and the unemployment rate would surge to over 7%. Stock prices would be cut almost in one-third at the worst of the selloff, wiping out $12 trillion in household wealth.
Short-term lending markets would freeze up, while global stock market prices would drop precipitously. The U.S. economy—still recovering from the pandemic-related downturn—would be thrown into a recession.
Lastly, default would result in irrevocable damage to the nation’s credit rating, causing interest rates to rise and substantially increasing the cost of federal borrowing. A 1979 technical glitch that caused only a slight delay in Treasury bond payments caused the cost of federal borrowing to spike and remain high for several months. Though brief, the delay added tens of billions of dollars to federal borrowing costs.
Key House Republicans support holding the debt limit hostage
Given the catastrophic consequences of defaulting on the debt, one might imagine that Congress would automatically raise or suspend the debt limit every time that action is needed. In fact, Congress has routinely voted to approve or suspend the limit, voting to do so 102 times since the end of World War II and 20 times since 2001. However, in 1995, 2011, 2013, 2015, and 2021 there were significant delays in raising or suspending the debt ceiling. And now, House Speaker Kevin McCarthy (R-CA) has signaled that he and members of his caucus will not vote to raise or suspend the debt ceiling unless significant spending cuts are attached to the legislation. Of special note is that some House Republicans, such as Reps. Jodey Arrington (R-TX), Buddy Carter (R-GA), Lloyd Smucker (R-PA), and Jason Smith (R-MO), have said that cuts to Social Security and Medicare should be included in any debt ceiling increase or suspension, although some have walked back those statements recently. Other members of the caucus, such as Rep. Chip Roy (R-TX), have suggested that cuts to discretionary spending must be part of a debt limit agreement. In brief, the House majority has signaled that it will hold hostage an increase or suspension of the debt in order to achieve deep cuts to Social Security, Medicare, and/or discretionary programs.
Prioritization of spending is unworkable and untenable
House majority leaders, when faced with the prospect of default, have come up with an alternative to “avoid” it: prioritizing the use of available resources. Under such a scheme, Congress would specify which expenditures should be prioritized for payment out of limited resources and which should not. Unfortunately, however, this proposal is an alternative in name only. In fact, it increases the risk of default—and the harm of default to the economy—by suggesting that failure to increase the debt ceiling can somehow be managed administratively.
This proposal cannot feasibly be implemented. The Treasury makes hundreds of millions of payments each month and does not have the systems to pay some bills and not others. Treasury Secretary Yellen made that point clear when she said in January that, “Treasury systems have all been built to pay our bills, to pay all of our bills when they are due and on time and not to prioritize one form of spending over another.” The New York Times summarized the similar opinion of former Treasury Secretary Jack Lew: “The systems used to send out payments are not finely calibrated enough for the government to quickly and surgically adjust who receives checks.” And while Congressional Budget Office Director Phillip Swagel recently said that prioritization is “theoretically” possible, he added that, “Technologically, it’s challenging.”
What share of the nation’s bills could be paid without raising the debt ceiling?
Even if prioritization could be implemented, the proposal leaves unanswered the question of what share of the nation’s bills could be paid using incoming revenues in the absence of an increase in the debt limit. Suppose that the prioritization proposal called for the Treasury to pay interest on the debt, along with the cost of Social Security, Medicare, defense, and veterans’ benefits. Such a plan is somewhat similar, although not identical, to the Default Prevention Act reported out of the House Ways and Means Committee on March 9, 2023. Would the Treasury be able to fully pay the bills due on all priority programs? And how large a cut would be required in all other programs? A numerical example sheds light on these questions using monthly federal payment data.
Had a prioritization proposal been in place in 2022, available funds would have been insufficient to fully cover the costs of interest payments, Social Security, Medicare, veterans’ benefits, and defense spending in three of the seven months from June to December. (see Table 1 and the Methodology section). And in each of the seven months, deep cuts in nonpriority programs would have been required, leaving open the question of how to prioritize payments within the programs outside the specified priorities.
Prioritization is default by another name
The magnitude of the cuts that would be required to limit federal spending to the amount of incoming revenue demonstrates why prioritization is unworkable and would constitute default by another name. The federal government could not fulfill its obligations to beneficiaries, federal workers, state and local governments that administer federally supported programs, and the thousands of vendors that supply it with goods and services. Federal workers would be asked to work without pay—or alternatively, they potentially could be furloughed, leaving their families without the paychecks they need to meet financial obligations. Vendors and contractors similarly would be left without the income needed to cover their costs of doing business, and states and localities would be left on the hook to provide services without legally obligated federal funds. Even if the federal government eventually paid the amounts it owed, prioritization would result in a form of forced borrowing—with beneficiaries, workers, vendors, and state and local governments forced to bear the cost of inaction on the debt ceiling.
Delayed payments would also increase the ultimate cost of federal obligations, due to the interest payments that would be owed to federal vendors under the Prompt Payment Act and to taxpayers owed refunds by the IRS. Lastly, a structure that left the federal government unable to fulfill its legal obligations on a timely basis would likely result in a lower credit rating for federal debt and an ensuing increase in borrowing costs long into the future.
The House Republican proposal to substitute prioritizing payments for an increase in the debt ceiling is unworkable and untenable. Even if it could be implemented, it would have dangerous consequences that could increase the likelihood of default. This, in turn, would lead to chaos in global financial markets and push the nascent economic recovery into recession.
The authors wish to thank Bobby Kogan for his invaluable assistance with the analysis presented in this article.
The analysis presented in Table 1 is based on the Treasury Department’s Monthly Treasury Statements for the period of June 2022 to December 2022. Although month-by-month data fluctuate because revenues and expenditures vary considerably by month, this variation falls into similar patterns year by year. Therefore, data for 2022 provide a reasonable indication of the share of payments that could be paid out of incoming revenues in 2023. This analysis begins with the month of June because June 2023 is the earliest date at which the Treasury Department may exhaust available extraordinary measures, according to Treasury Secretary Yellen.