As Wall Street economists and federal budget analysts began pouring over the April tax returns last week, looking for clues to when the government might run out of borrowing authority, there was a significant development on the political front. House Speaker Kevin McCarthy unveiled The Limit, Save, Grow Act of 2023 (LSGA), which he said “would responsibly raise the debt limit into next year and provide more than $4.5 trillion in savings to American taxpayers.”
Those are good goals but by conditioning a debt limit increase on enactment of the deficit reduction plan, McCarthy is staging the right fight on the wrong hill.
The deficit reduction proposals in the LSGA are substantial. Among other things, the bill would roll back discretionary spending in 2024 to the enacted level of 2022, impose a discretionary spending cap of one percent annual growth over the next 10 years, clawback unspent COVID money, impose tighter work requirements for some means-tested benefit programs and repeal or scale back several Biden Administration initiatives such as student loan forgiveness, increased funding for the Internal Revenue Service, and climate change incentives enacted in the 2022. It would also suspend the debt limit until March 31, 2024 or until another $1.5 trillion has been incurred.
Like President Biden’s budget, released in March, McCarthy’s bill is essentially a partisan wish list. It is as “dead-on-arrival” in the Democratic controlled Senate as President Biden’s budget is in the Republican controlled House. Nevertheless, the LSGA can be viewed as a response to Biden’s budget and although it lacks the formalities required for a congressional budget resolution, it serves as the House Republicans’ starting point for negotiations.
But negotiations over what? McCarthy’s bill makes sense as an opening salvo in a budget negotiation, but it is highly problematic as a set of conditions for raising the debt limit.
There is an important distinction between the budget and the debt limit. Budgets are meant to be negotiated. Conditions imposed by one side or the other are an accepted practice in the back-and-forth process that takes place over spending and tax policy. Raising the debt limit is a very different thing. It is not about competing partisan agendas. It is about preserving the nation’s creditworthiness.
As explained by the Government Accountability Office (GAO), “The debt limit does not authorize new spending commitments. It simply allows the government to finance spending and revenue decisions (existing legal obligations) that Congress and the President have made in the past.”
If the government runs out of borrowing authority, as is projected to happen sometime this summer, it would not be able to pay all of its bills on time. Such a default on legal obligations would damage the nation’s creditworthiness, increase interest rates, and interfere with the smooth functioning of global financial markets, in addition to the hardship it would cause to anyone expecting a check from the government.
McCarthy has insisted that default is not an option. At the same time, he has insisted that he won’t support a debt limit increase without conditions. This is an irreconcilable proposition because if there is no debt limit increase, there will be a default. So, unless McCarthy is willing to force a default – something he says is not an option – his insistence on conditions for a debt limit increase is a hollow threat. President Biden seems to know that and thus has very little incentive to engage in a debt limit negotiation. He has said, however, that he is willing to negotiate on the budget.
What this suggests is that McCarthy would do better to have his showdown on the budget and not on the debt limit. There are ample reasons to be concerned about the nation’s fiscal path. Serious changes on the scale McCarthy has proposed will be needed just to achieve a downpayment on stabilizing the debt as a share of the economy. Indeed, it would take nearly twice what McCarthy has proposed to keep the debt-to-GDP ratio from rising over the next 10 years.
President Biden’s budget proposed a 10-year deficit reduction goal of $2.8 trillion. McCarthy’s goal is $4.5 trillion. Although the two plans are worlds apart in a policy sense, it is now possible to begin negotiations. But by presenting his budget cuts as a set of conditions for raising the debt limit, McCarthy is not offering the public a choice between his agenda and Biden’s agenda. He is offering a choice between his agenda and the government’s creditworthiness.
That is a risky economic strategy because it carries the threat of default, even one that is unintended. It is also politically risky because when crunch time comes, Americans waiting for delayed payments from the government might react very badly to the idea that they won’t get paid unless McCarthy’s agenda, or something like it, is enacted.
One way out of this box canyon would be to start by doing something called for in McCarthy’s bill: suspend the debt limit through March 31 or until another $1.5 trillion of new debt has been incurred. Even a short-term agreement to increase the debt limit would help alleviate market concerns and signal to voters and – more importantly – the financial markets that both parties take the consequences of default seriously.
The stage would then be set for a serious policy debate on the hill where this battle should be fought: the regular budget process. House Republicans would still have leverage to insist on conditions for passage of the 12 annual appropriation bills, including the discretionary spending levels that constitute the bulk of the savings in the LSGA.
Even this might not be enough to bring the two sides closer to a resolution, and the risk of a government shutdown at the end of the fiscal year in September would persist, but they would at least be negotiating over competing visions for the future and not over whether the government is going to default on its obligations from the past.