July 31 Debt Limit Deadline

Update 548 —  July 31 Debt Limit Deadline:
How to Avoid Policy Concessions This Time

This Saturday, July 31, the federal debt limit suspension passed by Congress two years ago expires. If Congress does not act, the U.S. could default on its debt in the fall, without precedent but promising catastrophic global economic effects. Republicans have threatened to vote against any debt limit legislation unless they get policy concessions in the form of spending cuts. 

During the August recess, negotiations will be ongoing though more under the radar. August won’t see bills completed and votes held, putting a lot of pressure on September.  Today, we cover the debt limit — a must-address item awaiting Congress in the fall — and offer a way to minimize the exposure and concessions for Democrats on the issue.

Best,

Dana

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The Congressional Budget Office recently estimated the so-called “X Date” for default to be in October or November. Treasury Secretary Yellen urged Congress last week to address the debt limit as soon as possible, citing the unpredictability of stopgap measures to prevent a default. Republicans’ irresponsible stance harkens back to the disastrous debt limit cycle of 2011.  

Debt Limit State of Play

Congress first instituted the debt limit in 1917 to allow the Treasury to issue debt without Congressional approval for every issue. Since then, Congress has raised or temporarily suspended the limit over 100 times. Over the past decade, Republicans have used the debt limit as a political hostage. In 2011, House Republicans forced a standoff with the Obama administration, leading to a last-minute deal to avoid a default. The result: a first-ever downgrade of the U.S. sovereign credit rating, a sharp decline in the market, and an increase in borrowing costs. In exchange for their votes, Republicans secured caps on federal spending that curtailed the post-2008 economic recovery.

A two-year suspension of the debt limit passed by Congress in 2019 will expire on July 31. At that point, the debt limit will reset to $22 trillion — plus the aggregate of the borrowing during the suspension. This will force the Treasury to pursue “extraordinary measures,” which can only last for so long before a default would occur, followed by exorbitant interest rates, decreased value of the dollar, government benefit cuts, and a decline in the full faith and credit of U.S. paper. 

Senate Republicans are currently threatening to vote against a debt limit bill unless they get policy concessions. Budget Committee Ranking Member Graham and other Senators want to tie a debt limit increase to spending caps, entitlement reform, or other “structural reforms” such as freezing lawmaker pay until a budget is agreed upon. This position contrasts with Republicans during the previous administration, in which they passed two debt limit suspensions with little fanfare. But with Democrats in power, Republicans are again willing to play chicken with the global economy at stake.  

Legislative Strategy Options

Democratic leadership will have to choose between one of the following legislative strategies to avoid a default scenario: 

• Regular Order: Congress could pass an increase or suspension of the debt limit as a standalone bill or attach the bill to must-pass legislation. A standalone bill is unlikely. Leadership will want to avoid exposing moderate members to what some consider to be a difficult vote. A more probable strategy would be to attach a debt limit suspension or increase to a continuing resolution that Congress will need to pass before September 30 to fund the government. Multiple votes could lead to a gratuitous and unforced delay, exposing Congress to more votes than necessary and pushing the U.S. closer to the X Date. Moreover, any of these scenarios would require 60 votes in the Senate to break a filibuster.
• Reconciliation: Congress could also raise the debt limit using budget reconciliation. The Congressional Budget Act of 1974 explicitly mentions the statutory limit on the public debt as one of three types of legislation eligible for reconciliation bills. If Congress advances a budget resolution with debt limit reconciliation instructions, Congress could then pass a debt limit increase with simple majorities in both chambers.  

Congress has used the reconciliation process four times for debt limit legislation — in 1986, 1990, 1993, and 1997. In the current Congress, the regular order option contains more unknowns than reconciliation. Democrats would have to decide whether to raise or suspend the debt limit, whether the legislation would be passed alone or attached to other legislation, what legislation it would be attached to, and how many separate votes this would require.

The Benefits of Reconciliation 

Democrats could avoid addressing these difficult questions by using the reconciliation process, which offers the following advantages: 

• Path of Least Resistance: Passing a debt limit increase via reconciliation is the most straightforward course. Making the debt limit a single, simple majority vote in the Senate would significantly decrease the risk of failing to act in time. A single vote to raise the debt limit with a simple majority would be much easier and less risky than multiple, unnecessary votes requiring at least 10 Republicans.
• Path of Fiscal Responsibility: The 2011 debt limit crisis resulted in S&P downgrading the United States’ credit rating, an unprecedented event with serious consequences such as increased borrowing costs. If Republicans were to force another standoff this year, markets would likely be rattled and the U.S. could face another credit downgrade. By using reconciliation, Democrats could easily avoid this scenario and demonstrate that they are acting fiscally responsible. 
• Obviating Policy Concessions: Republicans extracted from their hardline position in 2011 the Budget Control Act, which established harmful caps on federal discretionary spending. Democrats cannot allow the minority to use the debt limit to gain the spending cuts Republicans are likely to demand. The cost of doing so could be the loss of tens or hundreds of billions of dollars in needed government spending and a threat to the ongoing economic recovery.

Reconciliation for the debt limit is often avoided for political reasons. Majority leadership in Congress typically prefers to secure votes from the minority to avoid political attacks that the majority “alone” raised the debt limit. Minority Leader McConnell has as much as dared Democrats to use reconciliation for this reason. But any political disadvantage of Democrats’ “owning” the debt limit increase would be outweighed by avoiding unnecessary and harmful policy concessions to Republicans. 

Reducing Votes, Policy Compromises

Democrats cannot allow Republicans to use the debt limit as a bargaining chip. Not only are Republicans’ demands for spending cuts unreasonable, but their willingness to use the threat of economic disaster is dangerous and irresponsible. Further, the specter of multiple votes on the debt limit this year exposes Democrats to unnecessary policy compromises and raises the risk of a default scenario.

By the time a debt limit is reached, the spending — approved by both parties — has already occurred. One would be hard-pressed to find a member of Congress who lost reelection because they voted to increase the debt limit. A default, however, could inflict serious political damage on the Biden administration and Democrats’ slim congressional majorities.