Congress returned this week from its Easter and Passover recess facing what promises to be a heated debate over raising the nation’s borrowing limit. On Monday, House Speaker Kevin McCarthy visited Wall Street to debut the latest House Republican proposal to raise the debt ceiling. In his speech, McCarthy stated that in the coming weeks, the House would approve a one-year increase in the debt limit that will include a reduction in discretionary spending to 2022 levels while limiting future increases to 1% annually over the next 10 years.
This is the Republicans’ first proposal to raise the debt limit since U.S. Treasury Secretary Janet Yellen informed Congress on Jan. 13 that the federal government would exceed its borrowing authority of $31.38 trillion a week later, on Jan. 19. If McCarthy is able to get his proposal approved by the House, it will show an unprecedented level of Republican unity and will significantly strengthen his hand in negotiations with President Joe Biden, who demanded a “clean” debt ceiling increase during their Feb. 1 meeting – the only time the two have met in person on the topic.
The fiscal struggle over the debt ceiling is a regular occurrence in Washington and can be traced back to the system of checks and balances in the Constitution, which gives the president administrative authority over the federal government. But control over how those operations are paid for – the “power of the purse” – was given to Congress in Article 1, Section 8. As a result, debt limit debates have been common ever since.
Until an agreement to raise the debt ceiling is reached, the Treasury Department uses “extraordinary measures” to ensure that federal operations continue. Some of those measures include:
- Redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund;
- Suspending reinvestment of the Government Securities Investment Fund;
- Suspending reinvestment of the Exchange Stabilization Fund; and
- Suspending sales of State and Local Government Series Treasury securities.
The national debt and the annual federal deficit are not the same thing. The federal deficit is the amount of money that the federal government spends in a fiscal year in excess of the revenue that it receives. The national debt is the cumulative amount the federal government owes as a result of all the past deficits.
While the rhetoric of debt ceiling debates often gets heated, they are usually resolved before the extraordinary measures run out. The one exception was 2011, when Congress and President Barack Obama failed to reach an agreement by the deadline. That resulted in the U.S credit rating being reduced from AAA to AA+, causing disruption in the financial markets. Days later, the 2011 Budget Control Act, which increased the government’s borrowing authority and reduced projected spending (commonly known as sequestration), became law.
Failure to reach an agreement on the debt limit would create significant challenges for commercial real estate. It would result in significant market disruptions that would restrict access to credit, further exacerbating current global recessionary trends. In addition to placing further economic pressure on both landlords and tenants, the banking sector will be affected. The financial system holds an estimated $1.3 trillion in federal securities. If the Treasury is forced to default on those payments, it would create a major banking crisis, severely restricting access to capital.
However, if this debate follows the usual pattern, an agreement reducing discretionary spending and increasing federal revenues will be reached just before the deadline. As the experience in 2011 demonstrated, this is not guaranteed, and the threat of miscalculation is always present. But what we could see happen, is a suspension of the debt ceiling (or a small increase) until Sept. 30 when FY2023 spending levels expire, thereby aligning the debt limit deadline with the fiscal calendar. This would be a positive sign that negotiations are progressing on a larger spending deal, and will focus negotiations on a single date. Doing so will reduce the potential for multiple federal government shutdowns, and give more time for an agreement on FY2024 funding levels. Ultimately, fear of a government default because the debt ceiling is not increased will provide the impetus for the president and congressional leaders to reach an agreement. That will buy time, of course, until the next debt ceiling crisis.