According to a new report from the Government Accountability Office (GAO), delays in debt ceiling negotiations cost taxpayers between $38 million and $70 million in 2013. The agency made three recommendations to lawmakers in order to avoid a similar situation when the ceiling is reached again later this year.
Background
Under U.S. law, the amount of debt that the federal government can take on is limited to certain amounts. The current debt ceiling stands at $18.113 trillion, but that amount has been modified 14 times since 2001 as the government continues to incur deficits and spend more than it collects in taxes (in fact, since 1950 the federal government has operated at a deficit in every fiscal year except for 1969 and the period between 1999-2001). When government debt nears the statutory limit, the Department of the Treasury is forced to employ "extraordinary" accounting measures in order to avoid exceeding it; otherwise, the U.S. risks defaulting on its debts, which are held not only by the public but also foreign governments around the world.
A default could have catastrophic implications for financial markets at home and abroad. U.S. Treasury securities are seen by investors as extremely safe investments because over time the U.S. government has maintained an excellent credit rating and avoided default. That means it is able to borrow money at lower interest rates than other governments, and its borrowing costs -- which are ultimately paid by taxpayers -- are greatly reduced. A default would damage the government's credit rating and significantly increase borrowing costs and the interest it pays on its debts.
Recently NTUF covered reports from the Congressional Budget Office that show how quickly the debt has climbed. It was increasing by $12.8 billion per week in the current fiscal year until Treasury began its suspension of certain securities in March. Should interest rates increase due to a credit downgrade or default, taxpayers would be shouldering even more interest payments on what is already a historically high debt that continues to grow.
What GAO Found
GAO interviewed investors in the financial industry and found that they took "unprecedented action" to "systematically [avoid] certain Treasury securities" during the 2013 debt ceiling debates. As a result borrowing costs for Treasury increased by $38 million to $70 million (depending on models and assumptions used) above normal. In addition, investors told GAO that they are prepared to employ the same techniques during any future debt ceiling impasses and the impact could be even more severe.
What GAO Recommends
The report recommended three approaches to future debt ceiling modification debates in order to avoid a repeat of the 2013 scenario.
- Link action on the debt limit to the budget resolution. This would require a subsequent vote on whether to pass or reject legislation that raises the limit to the amounts required in the annual budget resolution. GAO noted that doing so would "better align decisions about fiscal policy with decisions about debt" as Congress would have to address the implications its budget has on the debt immediately, rather than waiting until it is about to reach the limit.
- Provide the administration with the authority to increase the debt limit, subject to Congressional disapproval. A similar approach was employed in the 2011 Budget Control Act, which gave President Obama authority to propose two debt limit increases. GAO reported that this option would essentially make that procedure permanent, "preserv[ing] Congress's ability to debate fiscal policy decisions and the current trajectory of federal debt" while also ensuring that inaction does not immediately disrupt financial markets. Some experts did note that it would still result in a disconnect between the budgets that Congress proposes and the effect they would have on the debt.
- Delegating broad authority to the administration to borrow as necessary to fund enacted laws. Essentially, this option would scrap the debt ceiling entirely and allow Congress and the President to spend whatever is necessary to achieve the laws they enact. Obviously, this would alleviate the problem of debt ceiling "political showdowns" and the ensuing impact on financial markets, but would also increase the likelihood that spending decisions would be made without thought to the impact on federal debt.
Economists predict that the current debt ceiling will be breached as early as October 2015 if Congress does not act. GAO's report provides lawmakers with some options to minimize the impact another showdown could have on financial markets (and the ensuing cost to taxpayers) as it debates what to do next. Regardless of where that may lead, Congress should consider the remarkable rate at which the federal debt is growing and how frequently policymakers find themselves confronting this issue.