The Debt Ceiling – The Fiscal Cliff

The Debt Ceiling – The Fiscal Cliff

Under Article I Section 8 of the United States Constitution, Congress has the sole power to borrow money on the credit of the United States. From the founding of the United States until 1917 Congress directly authorized each individual debt issuance separately. In order to provide more flexibility to finance the United States’ involvement in World War I, Congress modified the method by which it authorizes debt in the Second Liberty Bond Act of 1917. Under this act Congress established an aggregate limit, or “ceiling,” on the total amount of bonds that could be issued.


The current debt ceiling, in which an aggregate limit is applied to nearly all federal debt, was substantially established by Public Debt Acts passed in 1939 and 1941. The Treasury is authorized to issue debt needed to fund government operations (as authorized by each federal budget) up to a stated debt ceiling, with some small exceptions.


The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling does not have any direct impact on the budget deficit. The U.S. government proposes a federal budget every year, which must be approved by Congress. This budget details projected tax collections and outlays and, if there is a budget deficit, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually treated as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office (GAO) explains: “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.” The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.


Since 1979, the House of Representatives passed a rule to automatically raise the debt ceiling when passing a budget, without the need for a separate vote on the debt ceiling, except when the House votes to waive or repeal this rule. The exception to the rule was invoked in 1995, which resulted in two government shutdowns.


When the debt ceiling is reached, Treasury can declare a debt issuance suspension period and utilize “extraordinary measures” to acquire funds to meet federal obligations but which do not require the issue of new debt.  Treasury first used these measures on December 16, 2009, to remain within the debt ceiling, and avoid a government shutdown, and also used it during the debt-ceiling crisis of 2011. However, there are limits to how much can be raised by these measures.


The debt ceiling was increased on February 12, 2010, to $14.294 trillion.  On April 15, 2011, Congress finally passed the 2011 United States federal budget, authorizing federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011, with a deficit of $1.48 trillion,  without voting to increase the debt ceiling. The two Houses of Congress were unable to agree on a revision of the debt ceiling in mid-2011, resulting in the United States debt-ceiling crisis. The impasse was resolved with the passing on August 2, 2011, the deadline for a default by the U.S. government on its debt, of the Budget Control Act of 2011, which immediately increased the debt ceiling to $14.694 trillion, required a vote on a Balanced Budget Amendment, and established several complex mechanisms to further increase the debt ceiling and reduce federal spending.


On September 8, 2011, one of the complex mechanisms to further increase the debt ceiling took place as the Senate defeated a resolution to block a $500 billion automatic increase. The Senate’s action allowed the debt ceiling to increase to $15.194 trillion, as agreed upon in the Budget Control Act.  This was the third increase in the debt ceiling in 19 months, the fifth increase since President Obama took office, and the twelfth increase in 10 years. The August 2 Act also created the United States Congress Joint Select Committee on Deficit Reduction for the purpose of developing a set of proposals by November 23, 2011, to reduce federal spending by $1.2 trillion. The Act requires both houses of Congress to convene an “up-or-down” vote on the proposals as a whole by December 23, 2011. The Joint Select Committee met for the first time on September 8, 2011.


The debt ceiling was raised once more on January 30, 2012, to a new high of $16.394 trillion.


At midnight on Dec. 31, 2012, a major provision of the Budget Control Act of 2011 (BCA) is scheduled to go into effect. The crucial part of the Act provided for a Joint Select Committee of Congressional Democrats and Republicans — the so-called ‘Supercommittee ‘— to produce bipartisan legislation by late November 2012 that would decrease the U.S. deficit by $1.2 trillion over the next 10 years. To do so, the committee agreed to implement by law — if no other deal was reached before Dec. 31 — massive government spending cuts as well as tax increases or a return to tax levels from previous years. These are the elements that make up the ‘fiscal cliff.’  Source for the above: Wikipedia


PDF The Budget and Economic Outlook: Fiscal Years 2010 to 2020, 01/2010 [181 Pages, 1.9MB] – The Congressional Budget Office (CBO) projects that if current laws and policies remained unchanged, the federal budget would show a deficit of about $1.3 trillion for fiscal year 2010 (see Summary Table 1). At 9.2 percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4 trillion) posted in 2009. Last year’s deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year’s shortfall. The large 2009 and 2010 deficits reflect a combination of factors: an imbalance between revenues and spending that predates the recession and turmoil in financial markets, sharply lower revenues and elevated spending associated with those economic conditions, and the costs of various federal policies implemented in response to those conditions.

PDF The Budget and Economic Outlook: Fiscal Years 2008 to 2017, 01/2007 [194 Pages, 2.2MB] – If current laws and policies remained the same, the budget deficit would equal roughly 1 percent of gross domestic product (GDP) each fiscal year from 2007 to 2010, the Congressional Budget Office (CBO) projects. Those deficits would be smaller than last year’s budgetary shortfall, which equaled 1.9 percent of GDP (see Summary Table 1). Under the assumptions that govern CBO’s baseline projections, the budget would essentially be balanced in 2011 and then would show surpluses of about 1 percent of GDP each year through 2017 (the end of the current 10-year projection period). The favorable outlook suggested by those 10-year projections, however, does not indicate a substantial change in the nation’s long-term budgetary challenges. The aging of the population and continuing increases in health care costs are expected to put considerable pressure on the budget in coming decades. Economic growth alone is unlikely to be sufficient to alleviate that pressure as Medicare, Medicaid, and (to a lesser extent) Social Security require ever greater resources under current law. Either a substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of spending and revenue changes will be necessary to promote the nation’s longterm fiscal stability. CBO’s baseline budget projections for the next 10 years, moreover, are not a forecast of future outcomes; rather, they are a benchmark that lawmakers and others can use to assess the potential impact of future policy decisions. The deficits and surpluses in the current baseline are predicated on two key projections.

PDF The Budget and Economic Outlook: Fiscal Years 2006 to 2015, 01/2005 [179 Pages, 1.9MB] – This volume is one of a series of reports on the state of the budget and the economy that the Congressional Budget Office (CBO) issues each year. It satisfies the requirement of section 202(e) of the Congressional Budget Act of 1974 for CBO to submit to the Committees on the Budget periodic reports about fiscal policy and to provide baseline projections of the federal budget. In accordance with CBO’s mandate to provide impartial analysis, the report makes no recommendations. Chapter 1, The Budget Outlook, provides a review of 2004 followed by discussions on The Concept Behind CBO’s Baseline Projections, Uncertainty and Budget Projections, The Long-Term Outlook, Changes to the Budget Outlook Since September 2004, The Outlook for Federal Debt, and Trust Funds and the Budget. Chapter 2, The Economic Outlook, presents an Overview of CBO’s Two-Year Forecast followed by discussions of The Importance of Productivity Growth for Economic and Budget Projections, The Outlook for 2005 and 2006, The Economic Outlook through 2015, Taxable Income, Changes in CBO’s Outlook Since September 2004, and A Comparison of Forecasts. Chapter 3, The Spending Outlook, focuses on Mandatory Spending, Discretionary Spending, and Net Interest. Chapter 4, The Revenue Outlook, examine Revenues by Source, Revenue Projections in Detail, Uncertainty in the Revenue Baseline, Revisions to CBO’s September 2004 Revenue Projections,and The Effects of Expiring Tax Provisions. Appendixes A through F focus on the following: How Changes in Economic Assumptions Can Affect Budget Projections, The Treatment of Federal Receipts and Expenditures in the National Income and Product Accounts, Budget Resolution Targets and Actual Outcomes, Forecasting Employers’ Contributions to Defined-Benefit Pensions and Health Insurance, CBO’s Economic Projections for 2005 to 2015, Historical Budget Data, and Contributors to the Revenue and Spending Projections. A glossary completes the report.

PDF The Debt Limit: History and Recent Increases, 09/08/2010 [26 Pages, 400kb] – Total debt of the federal government can increase in two ways. First, debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public. Second, debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. The sum of debt held by the public and debt held by government accounts is the total federal debt. Surpluses generally reduce debt held by the public, while deficits raise it. On September 3, 2010, total federal debt outstanding was $13.435 trillion.

PDF Economic Renewal: A Grand Strategy for the United States, 03/24/2010 [34 Pages, 389kb] – The nation’s continuing deficits and increasing debt will lead to its declining economic strength if not checked. Economic power is the foundation for the other elements of national power so economic problems degrade military power, erode America’s international image, and potentially may lead to declining faith in democratization efforts abroad as developing nations find free market capitalism less attractive. The U.S. should adopt a grand strategy of “economic renewal” to maintain its economic power. By taking steps to reduce its debt and leading an international effort to replace the dollar as the global currency, the United States can focus on rebuilding its economic power and maintaining its role as a global leader. Supporting military, diplomatic, and informational strategies will ensure the world sees these changes as the actions of a global power leading visionary change instead of a declining power trying to hold onto a fading empire. Changes led by the U.S. are essential for this country to maintain its power as well as to shine as a beacon of free market and democratic principles around the world.

PDF The Federal Budget: Current and Upcoming Issues, 12/10/2008 [22 Pages, 550kb] – The federal budget implements Congress’s “power of the purse” by expressing funding priorities through outlay allocations and revenue collections. Over the past decade, federal spending has accounted for approximately a fifth of the economy (as measured by GDP) and federal revenues have ranged between just over a fifth and just under a sixth of GDP. In FY2008, the U.S. Government collected $2.5 trillion in revenue and spent almost $3.0 trillion. Outlays as a proportion of GDP rose from 18.4% in FY2000 to 20.9% of GDP in FY2008. Federal revenues as a proportion of GDP reached a post-WWII peak of 20.9% in FY2000 and then fell to 16.3% of GDP in FY2004 before rising slightly to 17.7% of GDP in FY2008. The budget also affects, and is affected by, the national economy as a whole. Given recent turmoil in the economy and financial markets, the current economic climate poses a major challenge to policy makers shaping the FY2009 and FY2010 federal budgets. Federal spending tied to means-tested social programs has been increasing due to rising unemployment, while federal revenues will likely fall as individuals’ incomes drop and corporate profits sink. As a result, federal deficits over the next few years will likely be high relative to historic norms. In addition to funding existing programs in a challenging economic climate, the government has undertaken significant financial interventions in an attempt to alleviate economic recession. The ultimate costs of federal responses to this turmoil will depend on how quickly the economy recovers, how well firms with federal credit guarantees weather future financial shocks, and whether or not the government receives positive returns on its asset purchases. Estimating how much these responses will cost is difficult, both for conceptual and operational reasons. Despite these budgetary challenges, many economists believe that fiscal policy would be the most effective macroeconomic tool under current conditions.

PDF Federal Debt and Interests Costs, 05/2003 [106 Pages, 7.4MB] – The federal debt has grown rapidly in the past decade, and this trend is projected to continue. Interest costs have grown commensurately and now account for about one of every seven dollars spent by the government. In response to a request from the House Committee on Ways and Means, this study provides background material on federal debt and interest costs–their components, their sensitivity to assumptions about future deficits and interest rates, and the choices that the Treasury faces in deciding the mix of securities it will offer.

PDF The FY2011 Federal Budget, 03/09/2010 [24 Pages, 300kb] – While considering the FY2011 budget, Congress faces very large budget deficits, rising costs of entitlement programs, and significant spending on overseas military operations. In FY2008 and FY2009, the enactment of financial intervention and fiscal stimulus legislation helped to bolster the economy, though it increased the deficit. While GDP growth has returned in recent quarters, unemployment remains elevated and government spending on “automatic stabilizer” programs, such as unemployment insurance and income support, remains higher than historical averages.

PDF Reaching the Debt Limit: Background and Potential Effects on Government Operations, 02/11/2011 [23 Pages, 307kb] – The gross federal debt, which represents the federal government’s total outstanding debt, consists of two types of debt: (1) debt held by the public and (2) debt held in government accounts, also known as intragovernmental debt. Federal government borrowing increases for two primary reasons: (1) budget deficits and (2) investments of any federal government account surpluses in Treasury securities, as required by law. Nearly all of this debt is subject to the statutory limit. The federal debt limit currently stands at $14,294 billion. Following current policy, Treasury has estimated that the debt limit will be reached in spring 2011. Treasury has yet to face a situation in which it was unable to pay its obligations as a result of reaching the debt limit. In the past, the debt limit has always been raised before the debt reached the limit. However, on several occasions Treasury took extraordinary actions to avoid reaching the limit and, as a result, affected the operations of certain programs. If the Secretary of the Treasury determines that the issuance of obligations of the United States may not be made without exceeding the public debt limit, a debt issuance suspension period can be authorized. This gives Treasury the authority to utilize nontraditional methods to finance obligations.

PDF Wall Street and the Pentagon: Defense Industry Access to Capital Markets, 1990 – 2010, 11/2011 [23 Pages, 932kb] – Defense firms rely in part on cash raised from capital markets to finance ongoing operations as well as new investments in long-term assets, independent research and development, and retirement of maturing debt. The ability to access capital markets shapes the depth and breadth of the U.S. defense industry, the capabilities it can offer, and the cost of these capabilities to the Department of Defense. Given the monolithic nature of the defense market, it is paramount that decisionmakers understand the relationship between defense spending and the financial metrics that drive access to – and cost of – capital for defense firms. This paper presents the data and findings of research conducted by the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies (CSIS) on defense companies- access to capital markets during the period 1990-2010. The analysis shows that for the universe of defense equities analyzed, there exists a positive relationship between defense spending, companies’ financial health, and the industry’s relative market valuation. However, no evidence was found to suggest that these firms encountered difficulties accessing capital markets either during a period of market contraction (1990-2001) or during the recent budget buildup (2002-2010).




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