Debt Ceiling and Federal Default Q&A

Debt Ceiling and Federal Default Q&A

Debt Ceiling and Federal Default Q&A

What should legislators ask in exchange for increasing the debt ceiling?

“Congress needs to impose a spending limit on all future budgets,” said Antony Davies. “By exchanging the debt ceiling for a spending ceiling, we take tax hikes off the table and focus attention on the source of the deficit problem: spending.”

“After a budget is passed, all discretionary spending allocations should be reduced by the same percentage so that total budgeted spending does not exceed 19 percent of the previous year’s GDP. This way, no single person has to take political heat for cutting specific programs since the cuts are automatic and across the board,” Davies said.

What is the likelihood that such significant spending cuts or limits will be made?

 “The debt ceiling debate is a sideshow because neither party is willing to deal with the real problems we face, such as entitlements,” said David Primo.

“ A focus on the debt ceiling allows both parties the opportunity to score political points, without accomplishing anything.  Even if Republicans are successful in demanding spending cuts in exchange for increasing the debt ceiling, those cuts will do next-to-nothing about our massive deficits,” Primo said.

Will the federal government actually default if the debt ceiling is not raised?

Veronique De Rugy said that technically, if the debt nears its statutory limit, the Treasury Department cannot issue new debt to manage short-term cash flows or manage the annual deficit and the government may be unable to pay its bills.  

“But in the real world things are different,” said de Rugy. “The federal government has other options than to default.”

“If the debt ceiling is not increased, the Treasury can make interest and debt payments its first priority to avoid default, essentially putting the government on a stringent pay-as-you-go basis,” said de Rugy.

How likely is it that the debt ceiling will be raised?

“It will almost surely be raised,” said Veronique de Rugy. “It has become merely a symbolic cap, with Congress increasing the debt limit ten times in ten years, and raising it twice annually in 2008 and 2009.” 

Antony Davies agrees that the cap will be raised.

“The more likely scenario is that the debt-ceiling ‘crisis’ will be used for political grandstanding," Davies said. "Hopefully, responsible politicians will use this opportunity to strong-arm the irresponsible ones into accepting spending controls with serious teeth.”

What would a government shutdown look like?

Bruce Yandle, who was employed by the Federal Trade Commission during the shutdown 30 years ago, shares his perspective.

“When Congress chooses to cease funding government operations, federal agencies, by law, cannot function,” Yandle said. “A complete shutdown would end temporarily such things as protection of the president and congress, closing the FBI, ceasing protection of the food supply, agriculture commodity inspecting for export, and airport security, just to mention a few items.  By law, when the government shuts down, agencies must begin immediately to close shop, store records, and send sensitive materials to secure warehouses.  Shut downs are extremely costly.”

But a shutdown is unlikely, Yandle said. “Citizens tend to punish members of congress who engage in shutting down government, so legislators have a strong incentive to not let it happen,” he said.

How serious would a default be?

“Default would dramatically increase the interest rates for buying federal government’s bond. This would push up interest payments even higher, further exacerbating our spending problem,” said Matt Mitchell.

“Government would either face the prospect of not being able to borrow anymore (and thus issue a huge tax increase), or it would face the prospects of radical austerity to try to regain the trust of the bond market.”

Under either scenario, very dramatic spending reductions and very significant tax increases would be likely, he said.

“I think the bond market’s faith in the US would be shaken for quite a while.  As government would have to pay higher interest rates, it would have to compete with other borrowers such as private businesses and families, and all interest rates would go up,” Mitchell said.

Photo courtesy of Flickr user suburbandollar.

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