Debt Limit Negotiation in the US Government

The US government's debt limit negotiation can be a complex and contentious issue. The debt limit is set by Congress, and when it's reached, the government can't borrow more money to pay its bills.

In 2011, the debt limit was breached, and the government was forced to prioritize its payments, causing widespread concern among investors. This led to a downgrade of the US credit rating by Standard & Poor's.

The debt limit has been raised 78 times since 1960, with the largest increase happening in 2019. The total debt has grown from $4.7 trillion to over $28 trillion since 1960.

Expand your knowledge: Government Invoice Factoring

The debt limit has been a contentious issue for decades, with its origins dating back to 1917. The Second Liberty Bond Act of that year introduced the concept of a statutory debt limit, which set limits on the aggregate amount of debt accumulated through individual categories of debt.

Before 1917, Congress authorized specific loans or allowed the Treasury to issue debt instruments for specific purposes, but this process was cumbersome. The Treasury had discretion over what type of debt instrument would be issued, but it lacked a clear overall limit.

In 1939, Congress simplified debt issuance by establishing one aggregate debt limit covering nearly all public debt. This framework remains in place today, allowing the Treasury Department to manage the federal debt as long as total debt stays below a statutory debt limit set by Congress.

The debt ceiling has been raised several times over the years, with notable instances including the $6 billion increase in 1954 and the Gephardt Rule imposed in 1979. The Gephardt Rule deemed the debt ceiling raised when a budget was passed, resolving the contradiction in voting for appropriations but not voting to fund them.

However, the debt ceiling lost its usefulness after the Budget and Impoundment Control Act of 1974, which reformed the budget process. Since then, a vote to increase the debt ceiling has usually been a formality between the President and Congress, with the debt ceiling not historically being a political issue that would make the government fail to pass a yearly budget.

See what others are reading: H B L Power Share Price

The federal budget process is separate from the debt ceiling negotiation. The President formulates a federal budget every year, which Congress must pass.

The budget details projected tax collections and expenditures, and specifies the estimated amount of borrowing the government would have to do in that fiscal year. This is done to help the government plan for its financial obligations.

Raising the debt ceiling does not directly increase or decrease the budget deficit. Instead, it's a limit on the government's ability to pay its already incurred obligations.

The Government Accountability Office explains that the debt limit does not control or limit the government's ability to run deficits or incur new obligations.

Consider reading: How to Make a Budget

The debt limit has a long and complex history in the US. The first statutory debt limit was introduced with the Second Liberty Bond Act of 1917, which set limits on the aggregate amount of debt through individual categories of debt.

Before 1917, Congress didn't have a debt ceiling, and they would either authorize specific loans or allow the Treasury to issue certain debt instruments for specific purposes. The first limit on total accumulated debt over all kinds of instruments was introduced in 1939.

In 1953, the US Treasury risked reaching the debt ceiling of $275 billion, and President Eisenhower requested a debt ceiling increase. However, the Senate refused to act on it, and the Treasury used its cash balances with banks to stay under the debt ceiling.

Worth a look: Money Market Instruments Types Role

In 2011, the debt limit was a major concern for the US government. The Treasury Department issued a report to Congress on the operation and status of the G Fund on August 24th.

The report was part of a larger effort to address the debt limit issue, which was projected to be exhausted on August 2nd. This was confirmed by Treasury on July 1st, and reiterated on July 15th.

On July 14th, Treasury Under Secretary Jeffrey Goldstein made a statement regarding Standard & Poor's announcement that it was considering downgrading the US credit rating. The next day, Goldstein made a similar statement regarding Moody's announcement.

In the months leading up to the August 2nd deadline, Treasury Secretary Timothy Geithner sent several letters to Congress and individual senators, including Senator Johnson, Senator DeMint, and Senator Bennet. These letters highlighted the importance of raising the debt limit.

The Treasury Department also implemented additional extraordinary measures to allow continued funding of government obligations, as the US reached its debt limit on May 16th.

Here is a list of key dates and events related to the debt limit in 2011:

Under Obama, the debt ceiling was a major point of contention. The administration sent debt limit letters to Congress multiple times, starting in August 2013, with Secretary Lew sending letters on August 2, 2013, and continuing through December 19, 2013.

Consider reading: B H P Billiton Share Price

The letters were a result of the impending debt ceiling deadline, which threatened to cause a default on US debt. The administration was proactive in warning Congress about the dangers of debt limit brinksmanship, with Secretary Lew warning of the dangers in a speech to the Economic Club on September 18, 2013.

Here's a timeline of the debt limit letters sent by Secretary Lew during Obama's presidency:

The administration also took steps to mitigate the impact of the debt ceiling, such as suspending sales of State and Local Government Series (SLGS) securities on October 17, 2013.

In 2014, the Treasury Department was busy with various reports and statements. Report to Congress on the Operation and Status of the G Fund was issued on March 20, 2014.

The Treasury Department resumed sales of State and Local Government Series (SLGS) Securities on February 18, 2014, after a brief suspension. This decision was likely made to facilitate the flow of funds to state and local governments.

Secretary Lew made a statement on February 12, 2014, which might have provided some insight into the Treasury Department's plans and policies. Unfortunately, the article doesn't provide more information about this statement.

The Treasury Department suspended sales of State and Local Government Series Securities on February 4, 2014, citing unspecified reasons. This move was likely made to address some pressing financial concerns.

On January 30, 2014, the Treasury Department issued a report to Congress on the Fund Operations and Status of the CSRDF/PSRHBF under the DISP ending October 17, 2013. This report might have provided some valuable information about the Treasury Department's financial activities.

Here are some key events that took place in 2014:

These events highlight the importance of timely reports and statements in maintaining transparency and accountability within the Treasury Department.

In 2015, the government took several significant steps in managing its debt and finances.

Report to Congress on the Operation and Status of the G Fund was submitted on December 8, 2015, providing an update on the government's investment fund.

Sales of State and Local Government Series (SLGS) Securities resumed on November 2, 2015, after a suspension.

Secretary Lew issued a statement on October 30, 2015, addressing the government's financial situation.

Debt limit letters were sent to Congress by Secretary Lew on multiple occasions in 2015, including October 30, October 15, October 1, September 10, July 30, July 29, March 17, March 16, and March 13.

Here is a list of the dates Secretary Lew sent debt limit letters to Congress in 2015:

In 2019, the Treasury Department had a busy year, with several key events that impacted the country's finances.

Secretary Mnuchin sent multiple debt limit letters to Congress, starting on May 23rd, and continuing on July 12th, July 25th, August 2nd wasn't one of them, but there was a letter on August 27th, and again on September wasn't mentioned, but there were letters on February 21st, March 4th, and March 5th.

The Treasury Department also released several reports to Congress, including one on the operation and status of the G Fund on August 27th, and another on the operation and status of the Civil Service Retirement and Disability Fund on March 5th.

Here are the key events of 2019:

The debt ceiling has been a topic of debate among economists and politicians for decades. Reports from the OMB and other sources in the 1990s repeatedly stated that the debt limit is an ineffective means to restrain the growth of debt.

Some argue that the debt ceiling is no longer necessary, given that Congress already approves spending and taxation. In fact, a survey of 38 highly regarded economists found that 84 percent agreed that a separate debt ceiling creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.

A key point of contention is that the debt ceiling is redundant, given that Congress already specifies exactly how much money the government can spend through comprehensive budget resolutions. This has led to suggestions that the debt ceiling should be abolished altogether.

In 2021, the U.S. debt ceiling has been described as "anachronistic", with the two major parties criticized for utilizing the debt ceiling to play a dangerous game of chicken for purely partisan political purposes.

The United States first instituted a statutory debt limit with the Second Liberty Bond Act of 1917, which set limits on the aggregate amount of debt through individual categories of debt.

Before 1917, Congress either authorized specific loans or allowed the Treasury to issue certain debt instruments for specific purposes.

In 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments.

The U.S. Treasury risked reaching the debt ceiling of $275 billion in 1953, prompting President Eisenhower to request a debt ceiling increase.

The Senate refused to act on the request, forcing the Treasury Department to get creative and use its cash balances with banks to stay under the debt ceiling.

Starting in November 1953, the Treasury monetized close to $1 billion of gold left over in its vaults to avoid exceeding the $275 billion limit.

A $6 billion debt ceiling increase was eventually passed on August 28, 1954, after negotiations between the Senate and the executive branch.

You might enjoy: Roth Ira First Time Homebuyer

The Budget and Impoundment Control Act of 1974 changed the role of the debt ceiling, making it less useful for Congress to hold hearings and debates on the budget.

In 1979, a parliamentary rule called the "Gephardt Rule" was imposed, deeming the debt ceiling raised when a budget was passed.

This rule stood until it was repealed by the Republican-controlled Congress in 1995.

A vote to increase the debt ceiling has usually been a legal budgetary formality between the President and Congress since the 1950s.

As of 1993, the debt ceiling had not historically been a political issue that would prevent the elected government from passing a yearly budget.

A fresh viewpoint: What Is a Budget

The Clinton Presidency was a significant period in U.S. legislative history. During his time in office, the debt-ceiling debate of 1995 led to a showdown on the federal budget and resulted in the U.S. federal government shutdowns of 1995 and 1996.

Congress raised the debt ceiling eight times during the Clinton Administration. This was a major issue that required multiple resolutions to address.

The federal government shutdowns of 1995 and 1996 were a direct result of the debt-ceiling debate. This had a significant impact on the country.

In all, the debt-ceiling debate of 1995 was a major challenge for the Clinton Administration.

Explore further: Federal Reserve System

President Joe Biden played a significant role in debt ceiling increases during his first two years as president. The House and Senate, both controlled by the Democratic Party, passed a $480 billion increase in October 2021.

In December 2021, Congress voted to increase the debt ceiling by $2.5 trillion, which President Biden signed into effect on December 16, 2021. This set the debt ceiling at about $31.4 trillion.

The debt ceiling was hit on January 19, 2023, with a total of $31.4 trillion. This marked a significant moment in American history, as Republicans, who had taken control of the House in the 2022 midterm elections, threatened to use the filibuster to block the debt ceiling increase.

The crisis was ultimately resolved through negotiation of the Fiscal Responsibility Act of 2023.

Additional reading: Can I Increase My Heloc Limit

Congress has a few options to raise the debt limit, but each comes with its own challenges. Regular order is one approach, where Congress considers a debt limit increase or suspension on its own or as part of another bill, requiring 60 votes to avoid a filibuster in the Senate.

Under regular order, 10 Republican Senators would need to join all 50 Democratic Senators to end the debate on the bill. Alternatively, Senate Republicans could agree to a unanimous consent request for the bill to pass by a simple majority vote, with Vice President Kamala Harris casting the tie-breaking vote.

Congress has gotten creative about adjusting the debt limit through regular order, such as in 2013 when they let the Treasury Department suspend the debt limit but allowed Members to vote disapproving of that suspension. This gave Members who prioritize deficit reduction a chance to save face without threatening a default.

Reconciliation through the FY2023 Budget Resolution is another option, which would enable Congress to pass an increase with a simple majority vote in the Senate. This would allow the current Democratically-controlled House and Senate to raise the debt limit by a party-line vote.

However, reconciliation is procedurally onerous, requiring at least two weeks and lengthy vote series in the Senate. Importantly, reconciliation likely only allows Congress to increase the debt limit, not suspend it, as seen in the four times it has been used in the past.

Changing Senate rules with a simple majority vote could also be an option, but it would set a precedent allowing the Senate to sidestep the filibuster for debt limit increases or suspensions in the future.

For more insights, see: Bank Bailout Bill

The X Date is a crucial concept in understanding the debt ceiling debate. It's the point at which the U.S. government runs out of money to pay its obligations.

The X Date is determined by the Bipartisan Policy Center, a think tank that provides data and analysis on the debt limit. Shai Akabas, the director of economic policy, and his team work tirelessly to figure out when the X Date will occur.

The U.S. government spends more money than it takes in every year, which means it must take on debt to fund its spending. The debt limit, currently set at $31.4 trillion, is the maximum amount of debt the government is allowed to take on.

If Congress fails to raise or suspend the debt limit, the government will reach the X Date and risk defaulting on its obligations. This could have significant economic consequences, including damage to the global economy.

The X Date is not just a theoretical concept; it's a real deadline that requires careful planning and coordination. Shai Akabas and his team are working hard to provide accurate information and help prevent the U.S. government from blowing past the X Date without a solution.

Check this out: How to Negotiate with a Collections Agency