For the past few months, a crisis over the “debt ceiling” has dominated news coverage in the United States. Congress must periodically increase the amount that the federal government may borrow. Otherwise, the government risks defaulting on its obligations. The government reached the debt ceiling in January 2023, and the Department of the Treasury (DOT) warned that a default could occur by early June. Passing a bill increasing the debt ceiling became mired in politics for some time. The two major political parties in Congress worked out an agreement and passed a compromise bill, the Fiscal Responsibility Act (FRA) of 2023, in late May. The president signed it into law two days before the Treasury Secretary stated a default was likely. The FRA suspends the debt limit for almost two years and makes various changes to federal spending.
What is the Debt Ceiling?
The debt ceiling represents the maximum amount of money that the federal government may borrow. The U.S. Constitution gives Congress the sole authority to authorize the federal government to borrow money on credit. Congress directly authorized each debt that the DOT issued from the nation’s founding until 1917. That year, the Second Liberty Bond Act set a “ceiling” on the amount of new bonds that the DOT could issue without congressional approval. This allowed the DOT to sell war bonds to finance the Allies in World War I. Subsequent legislation expanded the debt ceiling to cover most types of government borrowing.
According to the DOT, Congress has raised or revised the debt ceiling 78 times since 1960. It has only become a partisan issue in recent years. On several occasions, the country has gotten close to default while lawmakers negotiated various issues in order to reach a debt ceiling deal. A debt ceiling crisis in 2011 led to a downgrade of the U.S.’s credit rating by several credit rating agencies for the first time in history. Another standoff between the political parties occurred in 2013.
Once the government reaches the debt ceiling, the DOT must use “extraordinary measures” in order to continue paying the government’s obligations. The government reached the debt ceiling on January 19, 2023. The DOT estimated that it would exhaust all of its extraordinary measures by June 5.
The House of Representatives passed the FRA on May 31 by a 314-117 vote. The Senate passed the bill, 63-36, on June 1. The president signed it into law on June 3.
What Would Happen if the Bill Had Not Passed in Time?
If Congress had not passed the FRA before the DOT ran out of extraordinary measures, the federal government would have defaulted on at least some of its debts. The impact of default can only be speculative since it has never actually happened. Potential consequences might have included:
• Downgrades in the country’s credit rating;
• Loss of consumer confidence, both nationally and internationally;
• Increased cost of borrowing;
• Significant economic slowdown; and
• Global recession.
During the 2011 debt ceiling standoff, U.S. stocks dropped in value by more than 4 percent in one day. Stocks also dropped in Europe, along with the prices of gold and various commodities. A report from the Government Accountability Office (GAO) found that the delay in raising the debt limit in 2011 led to about $1.3 billion in additional borrowing costs for the federal government that fiscal year. The GAO noted that other effects are harder to value, such as the cost of “divert[ing] Treasury’s staff away from other important cash and debt management responsibilities.”
What is in the Debt Ceiling Bill?
In addition to raising the debt ceiling, the FRA sets limits on federal spending, rescinds previously-appropriated funds that have not been spent yet and makes other changes to federal spending.
Debt Ceiling
The FRA does not raise the debt ceiling to a specific amount. Instead, it suspends the debt ceiling until January 1, 2025.
Spending Limits
Federal law sets caps on discretionary spending in “security” and “nonsecurity” categories for specific fiscal years. The FRA adds limits for both categories for fiscal years 2024 and 2025.
Rescission of Earlier Appropriations
n a section entitled “Save Taxpayer Dollars,” the FRA rescinds unused funds authorized by Congress in numerous earlier bills. This includes:
• Nearly all appropriations made in connection with the COVID-19 pandemic; and
• Most of the additional funding provided for the IRS in the Inflation Reduction Act of 2022.
PAYGO System
Executive agencies must use a pay-as-you-go (PAYGO) system for most actions that involve discretionary spending. New administrative actions must be budget neutral, meaning that
• They cost less money than they bring in; or
• Any new costs are offset by cutting costs elsewhere.
The Office of Management and Budget (OMB) is responsible for managing the system. The director of OMB has the authority to waive the PAYGO requirement in certain situations.
End to Student Loan Moratorium
Congress enacted a moratorium on many student loan payments in 2020 because of the COVID-19 pandemic. The Department of Education extended the moratorium multiple times. The FRA states that all payments must resume as of September 1, 2023.
Changes to Public Benefits
The FRA expands the work requirements for adults without dependents who receive benefits through the Supplemental Nutrition Assistance Program (SNAP). Currently, able-bodied adults without dependents who are 18 to 49 years old must work a minimum number of hours to be eligible for benefits. The maximum age will increase to 54 by fiscal year 2025. We will continue to closely monitor and report on any significant developments regarding the debt ceiling crisis and its implications.
