The U.S. Treasury Secretary Steven Mnuchin has urged Congress to raise the federal debt ceiling, which has been suspended since 2015 to prevent a U.S. default.
Reuters reported that Mnuchin wrote a letter to Speaker Paul Ryan that called paying back outstanding debt “a critical commitment” and said “extraordinary measures” will have to be taken to avoid default.
The United States is one of only a few nations where the legislature must approve periodic increases in the legal limit on how much money the federal government can borrow, and it has become a common practice for Congress to use the debt ceiling as a bargaining chip as to demand spending cuts.
A debt limit standoff in 2011 brought the government within hours of missing some payments before Congress increased the cap, prompting Standard & Poor’s to downgrade the U.S. credit rating for the first time ever.
Rather than setting a specific dollar limit on the debt, Congress in October 2015 simply suspended the ceiling until midnight on March 15, allowing normal borrowing to continue.
On March 16, 2017, the debt limit was reinstated from its suspension, and the Treasury Department began to implement its so-called “extraordinary measures” to continue meeting all of the federal government’s financial obligations with measures that will only cover the gap until October or November.
Some Republicans may challenge President Trump on the debt ceiling as they are with his health care legislation.
While extraordinary measures will provide Treasury with necessary breathing room, operating at the debt limit carries costs. Many Treasury employees spend time that would normally be spent on other work executing extraordinary measures and ensuring that the debt does not exceed its limit on a day-to-day basis.
In addition, delayed action on the debt limit can increase Treasury’s borrowing costs. The Government Accountability Office estimated that the debt limit impasse of 2013 cost the federal government $38 million to $70 million in that year alone.
Fitting in action on the debt limit will be difficult with a congressional calendar already packed with deadlines.
Fiscal Year (FY) 2017 appropriations for the federal government are scheduled to run out on April 28.
Without appropriations, the government would undergo a partial shutdown, ceasing operations and closing everything deemed “non-essential,” such as national parks.
While finalizing FY2017 funding, Congress will also need to review and conduct hearings on the new administration’s FY2018 budget.
Beyond just the budget, Trump and congressional leaders have set out an ambitious legislative agenda, planning to repeal and replace the Patient Protection and Affordable Care Act, pass large-scale tax reform, and enact a large infrastructure package all within the next year.
Although Mnuchin sent a letter urging Congress to raise the debt limit as soon as possible, it is not yet clear how addressing the debt limit fits into lawmakers’ broader goals.
The federal debt limit restricts the total amount of money that the Treasury Department can legally borrow at any point in time. When policymakers authorize spending that exceeds the government’s revenues, the result is a deficit.
To finance these shortfalls, Treasury must issue securities to private investors (such as pension funds or foreign governments) to make up the difference. These securities are collectively known as debt held by the public.
Although sometimes confused with each other, a default by the federal government on its financial obligations due to the debt limit is very different from a federal government shutdown.
A government shutdown occurs when a lapse in congressional appropriations causes federal programs considered “non-essential” to cease operations until new appropriations laws are passed. However, federal borrowing and spending considered essential—which includes interest payments on federal debt—continue uninterrupted.
In contrast, the debt limit sets a ceiling on the amount that Treasury can borrow to cover the government’s commitments that are already owed.
When Treasury can no longer borrow and exhausts other available methods to make payments, the federal government would eventually be forced to miss, delay, or reduce payments that it is obligated to make.
This would call into question the full faith and credit of the United States as an entity that always meets its financial obligations.
The modern debt limit was originally created to streamline federal borrowing. Since the initial debt limit was set at $45 billion in 1939, it has been increased 44 times under Republican presidents and 39 times under Democratic presidents.
Congresses with Democratic and Republican majorities have authorized these increases, both when their party controlled the White House and when it did not. Then, during the Obama era, Republicans in Congress tried using the debt cap as a political bargaining chip that threatened the stability of the world economy and now a new GOP administration faces a key test.
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