U.S. Government Debt Crisis

ECO397A Amardeep Singh Tomar, 11076

Dhruv Goel, 11252Gautam Chokhani, 11280

The above image shows Revenues and Outlays as percent GDP - Past and estimated in future

Debt-ceiling Crisis 2013

The 2013 United States debt-ceiling crisis is part of an ongoing political debate in the United States Congress about the national debt and debt ceiling. The 2013 crisis began in January 2013 and ended on October 17 with the passing of the Continuing Appropriations Act, 2014, though the debate continues.

Defining debt ceilingThe maximum amount of monies the United States can borrow. The debt ceiling was created under the Second Liberty Bond Act of 1917, putting a "ceiling" on the amount of bonds the United States can issue. As of the end of July, 2011 the debt ceiling was set at $14.3 trillion.

Also known as the "debt limit" or "statutory debt limit."

● The debt ceiling had technically been reached on December 31, 2012, when the Treasury Department commenced "extraordinary measures" to enable the continued financing of the government

● According to the Government Accountability Office,

"The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred."

It does not prohibit Congress from creating further obligations upon the United States.

● The ceiling set in 2011 - $16.4 trillion

Background

On January 15, 2013, Fitch Ratings warned that delays in raising the debt ceiling could result in a formal review of its credit rating of the U.S., potentially leading to it being downgraded from AAA.

Investment grade · AAA : the best quality companies, reliable and stable · AA : quality companies, a bit higher risk than AAA · A : economic situation can affect finance

Fitch cautioned that a downgrade could also result from the absence of a plan to bring down the deficit in the medium term. Additionally, the company stated that

"In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline."

January 14, 2013 - President Obama stated that not raising the debt ceiling would ● Cause delays in payments including benefits● Delays in government employees' salaries● Lead to default on government debt

President Obama urged Congress to raise the debt ceiling without conditions to avoid a default by the United States on government debt.

Opinions● Republican Speaker of the House, John Boehner and the Senate Republican minority leader, Mitch McConnell

as well as other Republicans argued that the debt ceiling should not be raised unless spending is cut by an amount equal to or greater than the debt ceiling increase.

● Republicans also argued that the Treasury can avoid debt default by prioritizing interest payments on government debt over other obligations

● Several Democratic House members, including Peter Welch, proposed removing the debt ceiling altogether. This proposal found support from some economists such as Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

● Raising the debt ceiling was also supported by Ben Bernanke, chairman of the Federal Reserve.● A survey of 38 economists found that 84% agreed that a separate debt ceiling that is periodically increased

could lead to uncertainty and poor fiscal outcomes

Ongoing debate

Mid-January - Paul Ryan, Chairman of the House Budget Committee, floated the idea of a short-term debt ceiling increase. He argued that giving Treasury enough borrowing power to postpone default until mid-March would allow Republicans to gain an advantage over Obama and Democrats in debt ceiling negotiations. This advantage would be due to the fact that postponing default until mid-March would allow for a triple deadline to be in March: the sequester on March 1, the default in the middle of the month, and the expiration of the current continuing resolution and the resulting federal government shutdown on March 27.

The budget sequestration in 2013 refers to the automatic spending cuts to United States federal government spending in particular categories of outlays that were initially set to begin on January 1, 2013, as an austerity fiscal policy as a result of Budget Control Act of 2011 (BCA), and were postponed by two months by the American Taxpayer Relief Act of 2012 until March 1 when this law went into effect

Suspension of the debt ceiling

House Republicans quickly came up with an idea that would suspend the debt ceiling enough to allow time for both chambers of Congress to pass a budget.

● February 4, 2013- President Obama signed into law the "No Budget, No Pay Act of 2013", which suspended the U.S. debt ceiling through May 18, 2013. The bill was passed in the Senate one week previously by a vote of 64-34, with all "no" votes from Republican senators, who were critical of the lack of spending cuts that accompanied an increase in the limit.

● In the House a provision was attached by Republican representatives that mandates the temporary withholding of pay to members of Congress if they do not produce a budget plan by April 15. Pay would be reinstated once a budget was passed or on January 2, 2015, whichever came first.

● Under the law, the debt ceiling would be set on May 19, 2013 to a level "necessary to fund commitment incurred by the Federal Government that required payment."

In the United States, the No Budget, No Pay Act of 2013 is a law that was passed during the 113th United States Congress. The Act temporarily suspended the United States debt ceiling from February 4, 2013 until May 18, 2013. It also placed temporary restrictions on Congressional salaries.

Timeline● March 1- The sequester, cutting $1.2 trillion over the next decade, went into effect after the

parties failed to reach a deal.● March 21- The House passed a FY 2014 budget that would balance the United States budget in

2023. This was a shorter period than envisaged in their 2013 budget, which balanced in 2035, and the 2012 budget, which balanced in 2063. It passed the House on a mostly party-line 221-207 vote. However, later that day, the Senate voted 59-40 to reject the House Republican budget.

● March 23- The Senate passed its own 2014 budget on a 50-49 vote. The House refused to hold a vote on the Senate budget.

● April 10- The President released his own 2014 budget, which was not voted on in either house of Congress.

Throughout March and April, there were several developments that reduced the sequester's impact. The bill that extended the government's continuing resolution to September 30 lessened the sequester's effect on defense, and later bills removed furloughs for air traffic control and food service industries.

Developments during suspension

● May 19- Debt ceiling just under $16.7 trillion - No provisions made for further commitments after the ceiling's reinstatement - Treasury began applying extraordinary measures once again.

● Congressional Budget Office (CBO), projected exhaustion of the extraordinary measures in October or possibly November.

● August 26- Treasury informed Congress that if the debt ceiling was not raised in time, the United States would be forced to default on its debt sometime in mid-October.

● September 25- Treasury announced that extraordinary measures would be exhausted no later than October 17, leaving Treasury with about $30 billion in cash, plus incoming revenue, but no ability to borrow money.

Debt ceiling reaches!!

Obama and Republicans disagreed on the terms of raising the nation's debt limit.House Republicans described a number of policies they wanted to enact before they would agree to increasing the debt ceiling beyond October 2013-

● Privatize Medicare and/or Social Security - Long term debt ceiling increase● Cut food stamps, use the chained consumer price index (CPI), tax reform, agree to enact

block-grant Medicaid or a large raise in the retirement age - Medium term debt ceiling increase

● Means testing of Social Security, a small raise in the retirement age or ending agricultural subsidies - Short term debt ceiling increase

Obama asserted that the sequestration cuts of 2013 represent a budget compromise - does not intend to negotiate further on the issue of debt repayment.

However, the president said that he would be willing to negotiate on almost any issue after a clean bill to reopen the government and increase the debt ceiling has been passed.

October 2013 - Debt ceiling debate

● September 2013- The House of Representatives drafted a bill -postpone default for twelve months

● The bill also included a one-year delay in implementation of ○ Patient Protection and Affordable Care Act, a requirement for

both houses of Congress to vote on tax reform plans by the end of 2013

○ The Affordable Care Act (ACA) or "Obamacare" is a United States federal statute signed into law by President Barack Obama on March 23, 2010.

○ The ACA aims to increase the quality and affordability of health insurance, lower the uninsured rate by expanding public and private insurance coverage, and reduce the costs of healthcare for individuals and the government.

○ A fast-track process to begin construction of the Keystone XL Pipeline.

However, the bill was not voted on by the House or Senate due to some members of the House Republican caucus believing that the bill did not make deep enough spending cuts to be worthy of Republican support.

OCTOBER 1 - OCTOBER 17

The US Government went into a partial shutdown on October 1, 2013, with about 800,000 Federal employees being put on temporary leave. Treasury Secretary Jack Lew reiterated that the debt ceiling would need to be raised by October 17.In early October 2013, the House drafted a bill that would raise the debt ceiling without conditions through November 22, but keep the partial government shutdown in place. However, it died due to insufficient support among both House Republicans and House Democrats.

October 16- The Senate passed the Continuing Appropriations Act, 2014 ending-● The United States federal government shutdown of 2013● The United States debt-ceiling crisis of 2013.

The Continuing Appropriations Resolution, 2014 (H.J.Res. 59) is a failed continuing resolution that was introduced into the United States House of Representatives on September 10, 2013 that would make continuing appropriations for the fiscal year 2014 United States federal budget.The resolution passed the House on September 20. The Senate refused to adopt the resolution, leading to the government shutdown that began on October 1The Senate amended the bill, changing its name to the Continuing Appropriations Act, 2014, adding a continuing resolution to fund the government until January 15, 2014, and suspending the U.S. debt ceiling until February 7, 2014, in addition to other matters, while retaining the House's original ACA verification provision.

House-Senate budget conference set up to -● Negotiate a long-term spending agreement, and ● Strengthening income verification for subsidies under the ACA.

Senate -> 81-18 in favor.House -> 285-144, Passed the bill unamended later that dayThe President -> Signed the bill morning, October 17.

FEDERAL WORKERS RETURNED TO WORK ON OCTOBER, 17

Resolution

● October 15- Fitch Ratings placed the United States under a "Rating watch negative" in response to the crisis. Currently, U.S. is “AAA”.

● October 17- Dagong Global Credit Rating downgraded the United States from A to A−, and maintained a negative outlook on the country's credit. Following the downgrade, gold surged by 3%.A represented high credit rating, and A- is a level below that.

Aftereffect - Debt ratings of U.S.

Politically, the crisis caused approval to drop for the Republican Party, whose support for the debt-ceiling deal was needed, as it controlled the House.

● Americans blamed the Republicans more for the shutdown than President Barack Obama by a margin of 22 points (53 percent to 31 percent).

● Another poll - 74% disapproval rating of the way Republicans handled the crisis ,61% disapproved of the way Democrats handled the budget talks.

● According to a Gallup Poll, "60 percent of respondents said that a third major party is needed to represent the American people", an all-time high

Political aftereffect