How Lawmakers Should Be Thinking About The Upcoming Debt Ceiling Deadline

On August 1, the federal debt ceiling -- which has been suspended for nearly two years, since the passage of the Bipartisan Budget Act of 2019 -- will resume, and lawmakers will need to take some kind of action in the subsequent weeks or months if they want to head off a first-ever default on the federal government’s debt obligations. While Congress should not engage in brinksmanship over the full faith and credit of the U.S. Treasury, the upcoming debt ceiling deadline and debate offers an opportunity for lawmakers to meaningfully engage (or re-engage) in discussions centered on building a more fiscally responsible future for the country.

No Brinksmanship

One of last times there was significant “political brinksmanship” over the debt ceiling, in 2011, the U.S. received its first-ever credit rating downgrade from Standard & Poor’s, from AAA to AA+. The credit rating agency said at the time that:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

The Washington Post noted (emphasis ours) that “the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year.”

NTU is as frustrated as any stakeholder over some policymakers’ insatiable appetite for more spending, and other policymakers’ willingness to assume more debt in the name of spending trillions more dollars over the next decade. To that end, we share ideas below that could put the nation back on a more responsible fiscal footing, if lawmakers have the courage to reach across the aisle and work together on debt and deficit reduction.

It is clear from the 2011 debt ceiling experience, though, that the threat of default only brings negative consequences to American taxpayers and consumers. The nonpartisan Congressional Research Service sums it up well, writing that “inaction” or “delayed action” could lead to:

  • “reduced ability of Treasury to borrow funds on advantageous terms, thereby further increasing federal debt”
  • “substantial negative outcomes in global economies and financial markets caused by anticipated default”
  • “acquisition of interest penalties from delay on certain federal payments and transfers”; and
  • “downgrades of U.S. credit ratings, which could negatively impact capital markets.”

None of these consequences should be acceptable to lawmakers or Biden administration officials. Unfortunately, the only reasonable immediate options at this time seem to be another suspension of the debt limit or another increase in the debt ceiling. Lawmakers have exercised one of those two options 25 times in the past 28 years, and they likely will need to do so a 26th time in the next few weeks or months.

Debt Ceiling Should Refocus Lawmakers on Debt and Deficit Reduction

While lawmakers should not mess with the full faith and credit of the U.S. government -- and, in so doing, risk a credit downgrade and/or economic chaos during a fragile recovery -- the upcoming debate should refocus lawmakers from both parties and President Biden on immediate, bold solutions to reduce the nation’s $28.5-trillion debt and its projected deficits of $12 trillion over the next 10 years.

NTU and NTU Foundation have offered several roadmaps in the past few years, with policy options that we earnestly believe could earn bipartisan support:

Enacting another round of discretionary spending caps, as existed from fiscal years (FYs) 2012 through 2021 under the Budget Control Act (BCA) of 2011: In Table 2 of our “Budget Control Act of 2021” paper, we demonstrate how freezing discretionary spending for five years and then allowing it to rise with inflation could offer $1.7 trillion in savings relative to the Congressional Budget Office’s (CBO) baseline (at the time). Updated calculations for the same proposed caps, with CBO’s most recent July 2021 baseline (and a 1.6-percent cap increase per year for inflation in the latter half of the decade) present savings of over $2.5 trillion over 10 years, given projected discretionary spending is now much higher than it was when we released our paper. Discretionary spending caps would be politically challenging for both parties, given leading Democrats want a major boost to non-defense discretionary spending and leading Republicans want increases in defense discretionary spending. But lawmakers have agreed to such tough caps before. The greater battle would be getting Congress to stick to the caps. After the BCA of 2011, lawmakers ended up cheating the spending restraints to the tune of hundreds of billions of dollars over the decade, by either raising caps or spending outside the caps.

Meeting new spending caps and achieving additional deficit reduction with over $800 billion of reductions to both mandatory and discretionary spending, through recommendations from the 2020 NTU Foundation and U.S. Public Interest Research Group (U.S. PIRG) Education Fund “Toward Common Ground” report: Some of the discretionary spending cut recommendations -- including $422 billion in the defense budget -- could help lawmakers meet their deficit reduction obligations under new spending caps, like those outlined above. NTU Foundation and U.S. PIRG Education Fund also offer at least $170 billion in entitlement program reforms, which would reduce deficits and debt on the mandatory side of the spending ledger. We believe that if two organizations with diverse viewpoints can come together on these sensible deficit reduction recommendations, lawmakers of all ideological stripes can too.

Strengthening the mandatory sequester, as outlined in our Budget Control Act of 2021 paper: If Congress approves a sequester, or across-the-board spending cuts, for mandatory spending upon lawmakers’ failure to achieve deficit reduction targets -- and indeed, there is a separate mandatory sequester already in law for violations of the Statutory Pay-As-You-Go (PAYGO) Act -- then Congress should also make the sequester stronger than they made the BCA of 2011 sequester (and stronger than they have made the PAYGO Act sequester). As we noted earlier this year, the Balanced Budget and Emergency Deficit Control Act (BBEDCA) of 1985 includes nearly seven pages of mandatory programs exempt from the sequester, some as large as Social Security and some as small as the District of Columbia Judicial Retirement and Survivors Annuity Fund. Further, the Medicare sequester in the BCA of 2011 is capped at two percent of direct spending, raising the amount that needs to be sequestered from other non-exempt programs (from 3.9 percent to 5.9 percent, according to CRS). These exemptions result in the unequal treatment of other mandatory programs and of discretionary programs that are not exempt from sequestration cuts. Additionally, they reduce the political pain when lawmakers fail at their job of finding or adhering to spending cuts. The exemptions amount to Congress picking winners and losers. Congress should consider ensuring that no program or category is exempt from sequestration in a future budget agreement, with the exception of net interest on the debt. Congress should also institute a sequester for any increases in future discretionary spending caps, and should be forced to apply that sequester to a ten-year budget window (rather than extending the mandatory sequester as Congress has done time and time again with the BCA of 2011).

Passing the TRUST Act: which would set up rescue committees for the ailing trust funds that drive the majority of mandatory spending in the federal government. Specifically, the TRUST Act would pave the road for a bipartisan group of lawmakers and policy experts to stabilize Social Security and Medicare for the long run. Despite fear-mongering on the TRUST Act from some stakeholders, the legislation would require robust bipartisan support for any recommendations advanced to the full House and Senate -- and any recommendations would then need to pass both chambers of Congress and be signed into law by the president. The TRUST Act is a strong model for advancing bipartisan legislation to fix the nation’s ailing trust funds and to correct the long-term fiscal path of the largest mandatory spending programs. It should be part of any conversation on how to correct long-term spending trends.

Creating a new commission to examine debt and deficit reduction options: The nonpartisan Committee for a Responsible Federal Budget (CRFB) has argued that the Sustainable Budget Act, legislation from Reps. Ed Case (D-HI) and Steve Womack (R-AR) that would create a fiscal commission aimed at balancing the federal budget, “would set the stage for constructive discussions to put us on a more responsible fiscal path.” A commission modeled off the Sustainable Budget Act should seek to learn lessons from the failures of the 2011 “super committee” tasked with achieving debt and deficit reduction. While there is no guarantee that a 2021 committee would succeed, it is critically important for lawmakers to make good-faith efforts  at deficit reduction.

Changing and/or tightening the definition of “emergency” spending: Democrats and Republicans have abused “emergency” spending in recent years; prime examples were proposals from Democrats to fund the National Endowments for the Arts (NEA) and Humanities (NEH) at “emergency” levels that equaled more than one-third of their annual appropriations and from Republicans to build a new FBI headquarters. These proposals, and others like them, fly in the face of a reasonable definition of true “emergency” requirements. Congress should consider more restrictions about what can be classified as “emergency” spending; NTU has more here.

Strengthening PAYGO rules: As NTU Foundation’s Demian Brady has noted, “[t]o date, there has never been a sequestration order pursuant to PAYGO.” This is because several times over the ten-plus years the PAYGO Act has been in effect, Congress has exempted spending and revenue measures from the PAYGO scorecards. Congress should consider strengthening each chamber’s PAYGO rules so that Congress cannot avoid the PAYGO sequester for legislation when it is politically convenient to do so.

Enacting reforms in the Enzi-Whitehouse bipartisan budget process reform legislation from the 116th Congress: NTU endorsed the Bipartisan Congressional Budget Reform Act (BCBRA) from the 116th Congress, championed by former Senate Budget Chairman Mike Enzi (R-WY) and Sen. Sheldon Whitehouse (D-RI). That legislation includes 1) biennial budgeting, so Congress can plan its spending ahead of time rather than year-to-year, 2) debt-to-GDP targets, so lawmakers are not allowing federal debt levels to spin out of control relative to the size of the nation’s economy, 3) a special reconciliation process for deficit reduction, which would help prioritize deficit reduction for lawmakers interested in working in a bipartisan fashion on these matters, and 4) better committee oversight of expired authorizations of appropriations, so there is less ‘zombie spending’ across the federal government. All of these reforms and more are worthy of consideration from Congress, and could help greatly improve a broken budget process in Congress that often leads to unsustainable debt and spending levels.

Enacting Congressional Budget Office (CBO) reforms: NTU Foundation has regularly pointed to improvements to lawmakers’ budget and spending watchdog, the CBO, that would help lawmakers and taxpayers better understand the debt and deficit impacts of proposed legislation. Ideas we support include requiring CBO to account for the cost of servicing additional debt, requiring CBO to use confidence intervals in its cost estimates to measure for uncertainty, and requiring CBO to provide generational accounting reports that measure the long-term impacts of additional debts and deficits.

While lawmakers should not pursue these reforms in lieu of meaningful debt and deficit reduction, these budget process reforms could, in theory, be easier and quicker to achieve and implement than the often grueling work of spending cuts and sequesters.

Don’t Take Us to the Default Brink, But Pursue Sorely Needed Reforms

In conclusion, while the debt ceiling deadline is not a time for political games, partisanship, or brinksmanship, it does present a vital opportunity for lawmakers to meaningfully discuss debt, deficit, and spending reductions, along with long-overdue Congressional budget process reforms. We believe fiscally-minded Republicans and Democrats could support many of the above proposals, and we urge lawmakers to work together with the Biden administration to ensure that the next debt ceiling increase or suspension does not pass by without a single action taken on unsustainable debt and spending trajectories.