LegiStorm

Summary:

In September 2024, gross federal debt was about $35.3 trillion. Debt limit episodes have been a recurring feature of federal fiscal policy since 2001, when federal budget deficits returned after four years of surpluses. The main statutory debt limit covers nearly all—99.9%—of federal debt. Persistent federal deficits imply that federal debt and its statutory limit will remain a recurrent issue for Congress. The Fiscal Responsibility Act (P.L. 118-5) suspended the debt limit through January 1, 2025. The following day, the limit will be reset. When the Treasury Secretary cannot issue special Treasury securities to certain federal retirement accounts, she may invoke statutory authorities to use extraordinary measures. The U.S. Treasury’s headroom under the debt limit—meaning remaining borrowing capacity, extraordinary measures, and cash balances—has usually allowed it to meet federal obligations for several months after the invocation of those authorities. Extraordinary measures essentially convert debt subject to the statutory limit into implicit IOUs that are not subject to the limit. After the 1985 debt limit episode, a 1986 law formalized those authorities. During the 1995-1996, 2011, and 2013 episodes, the prospect that Treasury’s headroom could be exhausted—resulting in a binding debt limit—and that Treasury would be left unable to pay all of its obligations on time caused serious concerns in financial markets. This report analyzes possible consequences of a binding debt limit and possible policy options. A binding debt limit is distinct from an appropriations lapse that would leave federal agencies without the legal authority to commit funds to carry out their operations. If cash balances and funds available through extraordinary measures were exhausted, then the debt limit would bind. Treasury could then no longer issue new federal debt nor pay all federal obligations on time. Some state governments have delayed payments when under extreme fiscal pressure. Payment delays impose involuntary borrowing upon creditors, contractors, grantees, and others. Past Treasury officials expressed doubt that federal financial operations could transition to a regime of payment delays. During the 2011 and 2013 debt limit episodes, Treasury, Federal Reserve, and other federal financial regulatory officials engaged in contingency planning exercises to simulate operations and decisionmaking during a binding debt limit event. Federal Reserve officials also developed draft circulars and draft communications that might have been deployed. Some communications from Treasury officials stressed that principal and interest payments on federal securities would be paid. CRS, however, is not aware of evidence that Treasury or White House officials have approved contingency plans or the official issuance of action plans to prioritize certain payments. Financial organizations have also explored such scenarios. An Administration may possess some fiscal tools to delay or prioritize federal outlays during times of extreme fiscal stress, such as a binding debt limit. The Impoundment Control Act of 1974 (ICA; P.L. 93-344) authorizes the President, the Office of Management and Budget (OMB), or an agency head to impound—that is, to preclude obligation or expenditure of budget authority in some circumstances. For instance, deferral—the temporary withholding or delaying of the obligation or expenditure of budget authority—is one form of impoundment that might slow the pace of federal outlays. The ICA, among other restrictions, generally bars the use of discretion to effect “policy” impoundments. OMB’s process of apportionment— the release of budget authority to federal agencies—also might help delay or prioritize spending. During the 1995 debt limit episode, the Clinton Administration reviewed legal authorities to use these budgetary tools, but reached no firm conclusions. A binding debt limit that led to federal payment delays or failures to pay principal and interest on Treasury securities could disrupt financial markets, which in turn could affect economic activity more broadly. Treasury securities play a central role in repo lending, which major financial institutions use to reallocate liquidity. Repo—short for repurchase agreements—was a key transmission channel of financial stress during the 2007-2009 financial crisis. Some economists estimate that payment delays caused by a binding debt limit would seriously damage the financial markets and the U.S. economy. The definition of a federal default has become contentious. Some have suggested that Treasury could avoid default by prioritizing some payments and delaying others. Others contended that such a strategy would raise serious legal and operational difficulties. Members have introduced several bills over the past decade to prioritize some categories of federal spending during a binding debt limit event. Other proposals would change the structure of the debt limit or eliminate it completely. Some would allow the President to raise the debt limit, subject to a resolution of disapproval. In any case, Article I of the Constitution, which establishes the legislative power of the purse, places the ultimate responsibility for maintaining the federal government’s creditworthiness in Congress’s hands.