June 04, 2021
The Debt Limit Clock is Ticking
Congress will need to raise the statutory limit on federal debt by the end of this year. At the beginning of May, Treasury Secretary Yellen warned that the federal government could exceed the debt limit as soon as this summer, while outside analysts generally conclude the limit won’t be breached until the fall. In past years, the debt limit has been paired with major budget enforcement and deficit reduction legislation, such as the Gramm-Rudman Balanced Budget and Emergency Deficit Control Act in 1985 and the Budget Control Act (BCA) in 2011. More recently, it has been included in bipartisan budget legislation setting discretionary spending levels.
The debt limit is scheduled to be reinstated on July 31, 2021, although Treasury has a number of tools (“extraordinary measures” and managing cash balances) to provide additional time before the limit is breached. With less than one-third of federal spending subject to annual congressional approval and Congress failing to regularly adopt a budget resolution, the debt limit is about the only instance when Congress must confront the fiscal consequences of past budgetary decisions. And, they don’t like it.
As a result, congressional leaders try to take some of the political sting out of voting for legislation increasing the debt limit. They often package a debt limit increase with large, bipartisan budget agreements or appropriations legislation. Starting in 2013, Congress passed legislation suspending the debt limit to a future date and reinstating it at the higher level of debt outstanding on that date. This tactic avoids votes on a specific debt increase (See Chart I).
Congressional Action on the Debt Limit
|Statutory Pay-As-You-Go Act||FEB 10, 2010||+$1,900||$14,294|
|Budget Control Act||AUG 2, 2011||+$2,100||$16,394|
|No Budget, No Pay Act||FEB 4, 2013||Suspension to 5/18/13||$16,699|
|Continuing Resolution FY14||OCT 17, 2013||Suspension to 2/8/14||$17,212|
|Temporary Debt Limit Suspension Act||FEB 15, 2014||Suspension to 3/14/15||$18,113|
|Bipartisan Budget Act of 2015||NOV 2, 2015||Suspension to 3/14/17||$19,808|
|Continuing Resolution, FY18||SEP 8, 2017||Suspension to 12/8/17||$20,456|
|Bipartisan Budget Act of 2018||FEB 9, 2018||Suspension to 3/1/19||$21,988|
|Bipartisan Budget Act of 2019||AUG 2, 2019||Suspension to 7/31/21||TBD|
Chart I. Source: Congressional Research Service, Office of Management and Budget.
With control of the White House, House, and Senate, Democrats are responsible for passing the debt limit. Like most other legislation, a stand-alone debt ceiling bill is subject to a filibuster in the Senate. House Democratic leaders are unlikely to ask their members to vote for a clean debt ceiling increase if it’s going nowhere in the Senate, particularly with Senate Republicans signaling that they want budget reforms or dollar-for-dollar spending reductions equal to the debt limit increase. Democratic leaders also will want to make sure the debt limit increase is sufficient to get past the mid-term election. This requires roughly a $2 trillion plus-up.
This is an opportunity to come up with some reforms that will structurally change our debt problem. But I want to be responsible about it. I mean, we’re not going to play chicken here.
Senate Budget Committee Ranking Republican Graham (R-SC), May 13
Despite Senate Republican recent support for budget reforms or spending reductions as part of legislation increasing the debt limit, the near default by the U.S. government in 2011 right before the BCA was enacted and bipartisan fatigue with sequesters currently suggest no major budget reductions or reforms will accompany a debt limit increase.
At this stage, there appear to be two possible paths for enacting a debt limit increase: 1) as part of a bipartisan package, or 2) through the reconciliation process.
Experience suggests the more likely outcome is including the debt limit on a bipartisan bill, but that requires a negotiation between the White House and congressional leaders of both parties, with an uncertain outcome in the current political environment.
In addition to raising the debt limit, Congress must pass legislation to waive a $80-$90 billion Statutory Pay-As-You-Go (S-PAYGO) sequester (budget cut) that is scheduled for the end of this year due to the American Rescue Plan Act’s (ARPA) $1.9 trillion deficit increase. Ironically, S-PAYGO was enacted by Democrats as part of a 2010 debt limit increase to put in place a budget enforcement regimen. Under S-PAYGO, if mandatory spending or revenue legislation increases the deficit, a sequester is triggered to cut a small subset of mandatory spending, including up to a 4% reduction in Medicare. Although Congress has regularly waived S-PAYGO sequesters since 2010, it has done so in bipartisan budget legislation.
The reconciliation process cannot be used to waive S-PAYGO or enact annual appropriations, which suggests that Congress will find a bipartisan measure to carry these provisions. If a bipartisan agreement on an infrastructure bill emerges, that could become the legislative vehicle for a debt limit extension. If a compromise can’t be reached on infrastructure, other likely measures include either a bipartisan budget agreement to set the discretionary appropriations topline through at least FY23 or an end-of-year bipartisan omnibus appropriations bill. Enacting FY22 appropriations ultimately requires a bipartisan agreement on a discretionary top-line for FY22 and support from at least three of the “Big Four” congressional leaders. Speaker Pelosi (D-CA), Senate Majority Leader Schumer (D-NY), and Senate Republican Leader McConnell (R-KY) want to minimize prospects and blame for a government shutdown.
To avoid a Senate filibuster, Democrats can use reconciliation to increase the debt limit. Reconciliation gives them two options. They could revise the budget resolution they adopted at the beginning of the year to trigger a reconciliation bill solely devoted to an increase in the debt limit, but that exposes their narrow margins in both houses to a difficult partisan vote. Or, they could use the reconciliation process for an infrastructure bill or the Biden American Families Plan and add the debt limit to it.
While reconciliation is a fast-track process that precludes a Senate filibuster, it is a cumbersome process subject to the Byrd rule (restricting what may be included in the bill) and entails two Senate “vote-a-ramas” (a lengthy series of votes on minority party amendments). Unlike ARPA, which dealt with a pandemic during Biden’s first 100 days, elements of these multi-trillion Biden proposals will be more difficult to push through Congress. It is noteworthy that Democrats opted not to include a debt limit increase in ARPA.
Debt Limit Legislation & Variables
Like every Treasury Secretary, Secretary Yellen will ramp up pressure on Congress to extend the debt limit and avoid a default on U.S. securities. Precedent over the past decade suggests Congress will delay action on the debt limit until it becomes convenient or critical to act. As with any major and contentious legislative issue, the White House and congressional players will be influenced by other variables such as the success or failure of bipartisan deliberations, economic data (particularly inflation and interest rates), the path of the pandemic, natural disasters, and international crises. For Democrats, a break-the-glass option is to try to reach a bipartisan deal that includes a debt limit increase but, as a contingency, also pass a budget resolution allowing for the debt limit to be included in reconciliation.
95% | Congress and the President agree on a debt limit increase, avoiding a default of U.S. debt