8/7/2019 The Debt Ceiling - Time, Options, and Action

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Fact Sheet #77 January 12, 2011

THE DEBT CEILINGTime, Options, and Action

Time for Deliberation

Congress Has Time: Gross ederal debt has reached $14 trillion. Ongoing defcit spending (projected at $1.4trillion or 2011) means the ceiling o $14.29 trillion will initially be reached around mid-March. Treasurys

traditional fnancial toolbox and revenue surges in April and June should delay the fnal moment o reckoning tomid-May and possibly as late as July.

Full Consideration and Deliberation: Members o Congress have time or ull consideration and deliberationbeore making a decision on the debt limit and necessary spending cuts.

No Risk of Default: Keeping the debt ceiling at its current level would not, in and o itsel, risk deault on the debt.Federal taxes will still be collected by the Treasury from which interest and principal on the debt should be paid. Sincedeault is not immediately a realistic scenario, the ederal governments credit-worthiness would not be damaged.

Congress Has Many Options

Time to DemonstrateSeriousness: Congress has manyoptions regarding the debt limit,and it should not unduly rushinto a decision as i there issome imminent crisis pending.Instead, Members shouldpromptly have a ull discussiono the level o debt they wantto set and begin immediate,substantial spending cuts todemonstrate the seriousnesswith which they take the nationsfscal problems. These should be

ollowed by crucial additionalchanges such as hard spendingcaps and entitlement reormsthat would return the nation tofscal sanity and keep it there.

Immediate Spending Reductions a Necessity: Any increase in the debt ceiling should be accompanied byimmediate, substantial spending reductions along with strong new rules such as hard spending caps to requirecontinued, sharp spending reduction in uture yearsthus putting the budget squarely on a path to fscalresponsibility through lower spending, taxes, and borrowing. Increases without these steps are not acceptable.

One Option: One option Congress could also consider would be to provide only short-term increases to the debtceiling in order to provide additional opportunities to orce critical spending cuts through the legislative processduring the course o the year.

Absent Action

Without a Debt Ceiling Increase, Spending Must Be Cut Now: Holding the current debt ceiling in place wouldrequire eliminating all defcit spending. For the remainder o the fscal year, this would entail immediate spendingcuts o approximately $150 billion per month; the 2012 budget would have to eliminate the projected $1 trilliondefcit. These cuts would best be established through prompt legislation.

Choices Need to Be Made: Absent legislative direction, once the debt limit is fnally reached, the Administrationwould be required to pay the governments bills without additional borrowing. Some payments would likely occurnormally without reduction, such as interest on the debt and programs with dedicated revenues like Social Security.However, the Administration would need to determine which others would be subject to cuts and or delays.

Congressional Budget Office and White House Office of Management and Budget.Source:

DEBT AS A PERCENTAGE OF GDP

In 2008, publicly held debt as a percentage of the economy (GDP) was 40.8 percent, nearly fivepoints below the post-war average. Under President Obamas budget, this figure would morethan double to 90 percent by 2020. Continued structural debt poses serious economic risks.

Obamas Budget Would Send Federal Debt to Levels Not SeenSince World War II

0

20%

40%

60%

80%

100%

120%

1940 1950 1960 1970 1980 1990 2000 2010 2020

108.6%

90.0%

40.8%

Obamas

Budget