Warnings on the Debt Limit

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In part because of new deficit-financed tax cuts, the Congressional Budget Office (CBO) has moved up its projection for when lawmakers must act on the federal debt limit to the first half of March.

That projection had previously been late March or early April.

If Congress fails to raise the $20.5 trillion debt limit in time, CBO reminded them in a report last week, it “would ultimately lead to delays of payments for government activities, a default on the government’s debt obligations, or both.”

Another warning on the subject came from Treasury Secretary Steven T. Mnuchin, who urged lawmakers in a letter last week “to protect the full faith and credit of the United States by acting to increase the statutory debt limit as soon as possible.”

Lawmakers should heed that advice.

The debt limit increase should have been taken care of months ago. Previous spending and tax decisions made another increase in the debt limit inevitable, but lawmakers are always embarrassed by the need for such increases and generally delay approving them as long as possible.

In addition, some members of Congress irresponsibly try to use threats of a federal default as bargaining chips to pursue partisan agendas and engage in political posturing.

Such brinksmanship risks destabilizing financial markets and undermining confidence in the United States government both at home and abroad. That’s why The Concord Coalition has said the long-term solution is to revamp or scrap the current debt-limit process.

In the short term, however, Congress must simply ensure that it raises the debt limit in time to avoid the federal government defaulting on any of its financial obligations.

The debt limit was suspended from early last September until Dec. 8. Since then the Treasury Department — as in similar situations in the past — has relied on what it calls “extraordinary measures” to avoid a federal default.

These are essentially accounting gimmicks such as tinkering with investments made by the Civil Service Retirement and Disability Fund, which is one of the measures that Mnuchin briefly discusses in his letter to Congress.

Lawmakers must raise the debt limit before the “extraordinary measures” are exhausted. The budget office said it moved up its projection on when this would happen in part because the recent tax legislation reduced anticipated federal income tax withholdings by $10 billion to $15 billion per month, starting in February.

In addition, CBO said, the government had a $23 billion deficit in December and normally runs a deficit in the second quarter of the fiscal year.

The budget office cautions, however, that its projections are uncertain and that the extraordinary measures could be exhausted earlier or later than projected. So Congress shouldn’t take any chances.

Contrary to widespread belief, the debt limit does not actually exert control over the nation’s spending and tax policies. It simply enables the government to borrow the money necessary to pay its bills.

The big deficit-financed tax cuts are a perfect example. Congress and the president approved them in December even as the Treasury Department had already nearly run out of borrowing authority and was relying on its extraordinary measures to avoid a government default.

So there was no real connection between the debt limit and a major fiscal policy decision.

That sort of disconnect is worth remembering when elected officials bemoan the need to raise the debt limit.

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