August 2nd will mark the anniversary of the signing into law of the Budget Control Act (BCA) of 2011, the most significant spending reform enacted in decades. It was born out of circumstances similar to those we face today: the economy recovering in the aftermath of a severe economic recession, a large-scale federal fiscal response and other spending increases that are driving up the deficit, and the government running up against the statutory limit on federal debt.
Congress and the president regularly pass and sign laws that spend money far in excess of the level of revenues collected by the Internal Revenue Service. This means that the government must borrow more and more money to finance its day-to-day fiscal obligations. But the Treasury Department can only borrow up to a certain amount as there is a limit on the amount of publicly held debt. Over the past few decades, the limit has either been raised by a particular dollar amount when debt levels reached the limit, or in some cases, the debt ceiling has been temporarily waived for a length of time. Once that period expires, a new ceiling is set accounting for the additional debt accrued during the waiver.
Once the level of debt has reached the statutory limit, the Treasury is able to employ so-called “extraordinary measures” to meet day-to-day financial obligations. Extraordinary measures include the government deferring investments to certain civil pension funds until after the debt ceiling is raised. This can buy lawmakers a few additional months to make a deal.
Many have argued that we should just do away with the limit because the debt is only a result of laws enacted by Congress and the government should abide by these promises. Even though Congress always ends up taking action to increase or temporarily waive the debt ceiling, the limit is a useful and important reminder to lawmakers and the public about how much the government overspends. It is similar to getting a pop-up warning on a computer asking if you really want to open a downloaded file because it might be infected with a virus: “Lawmakers, are you sure you want to add even more to the federal debt burden of future taxpayers?”
Back in 2011, the federal government had run up against a statutory debt ceiling of $14.3 trillion, or 66 percent of GDP, preventing the Department of the Treasury from issuing new debt to finance deficit spending. After months of tense brinkmanship with a divided government, lawmakers eventually crafted the Budget Control Act of 2011, a grand compromise to impose a regime of fiscal discipline in exchange for a $2.1 trillion increase in the debt ceiling.
The BCA set statutory caps on spending through FY 2021 which were enforceable through automatic across-the-board spending cuts. It also established a joint committee to produce a plan including at least $1.5 trillion in deficit reduction. The failure of the committee triggered a further cap reduction and sequestration. This is the last year of the caps and there have been no serious discussions for a new budget restraint and enforcement regime.
The ten-year anniversary of the enactment of the BCA happens to coincide with a reset of the budget ceiling. The Bipartisan Budget Act of 2019, one of the laws that increased the BCA caps, suspended the debt limit through July 31, 2021. Since August 1 is a Sunday, the debt ceiling will be officially reset on Monday August 2 to account for the previous limit of $22 trillion plus the roughly $1 trillion in new debt accumulated since August 2019.
According to the latest available information from the Congressional Budget Office, the government’s publicly-held debt is now 102.7 percent of GDP and is on track to reach 106 percent of GDP in 2031. Even though the debt level has increased substantially since a decade ago, Congress and the President are focused on more deficit spending, passing on the bill to future generations of taxpayers. Instead of working on a successor to the BCA, it is looking increasingly likely that Congress will raise the debt ceiling as part of a reconciliation package tied with a trillion-dollar spending hike.
Even though its caps were revisited and raised several times, the BCA was important for providing a framework of budgetary discipline. It also helped reset spending to a lower baseline than would have otherwise occurred. With the current onslaught of deficits and debt and the possible resurgence of inflation that will make financing the debt even more costly, taxpayers deserve a BCA 2.0 now more than ever.