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What Will Happen If The National Debt Continuous To Rise

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

After the 2010 Congressional elections, it seems like the circus always comes back to town at this time of year. The number of House seats held by Republicans is now higher than it has been since 1938 (242 Republicans, 193 Democrats), while the number of Senate seats held by Democrats is unchanged at 53. Republican dominance of the House contrasts with Democratic control of the Senate notwithstanding President Obama’s 2012 reelection as a Democrat.

The yearly political circus is not just the result of a legislative body that is permanently split down the middle. An ultra-conservative movement, especially in rural areas and the Deep South, infiltrated the Republican Party as a result of the 2010 elections as well. This collection of legislators is a rare combination of anti-tax, decreased government spending, libertarian, social conservatism, and anti-immigration parties.

With the help of years of gerrymandering by both parties to create safe seats, the tea party was able to send 87 new Republicans to Congress who were fully committed to the movement. This reflects the impact the tea party has had on Congressional elections and party primaries, which has further pushed the Republicans to the right and encouraged them to adopt a “no compromise” stance.

The Federal Debt Limit

Putting it plainly, the debt limit is the maximum amount of debt that the United States government is allowed to carry at any given time. The Senate and House of Representatives approve it by a two-thirds vote. The debt ceiling does not regulate or restrict the Federal Government’s authority to incur or sustain deficits or debts. Contrary to popular belief, it is “a constraint on the ability to pay for commitments previously incurred,” as stated in a Government Accounting Office (GAO) Report to Congress from February 2011.

Akin to a debtor telling his creditors, “I can’t pay you because I don’t have any money in the bank,” the debt ceiling prevents the government from paying the bills or charges for initiatives that have been lawfully authorized by Congress.

Many academics and politicians have proposed doing away with the debt ceiling since it has failed to serve its intended purpose of reducing the federal deficit. The Initiative on Global Markets Panel, made up of experts from the best universities and labs in the United States, found that “a separate debt ceiling that has to be raised regularly generates unwarranted uncertainty and might potentially lead to worse fiscal consequences.”

Since the debt ceiling is a symptom rather than a cause of government expenditure, politicians are able to continue their lavish spending habits without fear of impeachment. One way to strengthen their conservative credentials is to vote for costly initiatives that are well-liked by their constituency, while at the same time rejecting a debt ceiling increase.

Even though the programs have been approved by a majority of members in both Houses, many fiscal conservatives feel that by opposing a debt limit hike, they will have a second chance to de-fund the programs they oppose. Some lawmakers have threatened to oppose financing legislation or an increase in the debt ceiling unless the Affordable Care Act (ACA, sometimes known as Obamacare) is repealed.

Texas Republican and tea party darling Ted Cruz recently appeared on CNBC’s “The Kudlow Report,” where he advocated for a continuing resolution that would finance the federal government in its entirety apart from Obamacare. The debt ceiling has been called an “excellent leverage point” to attempt to force action on healthcare reform, and an adviser to House Majority Leader Eric Cantor has seemingly agreed.

Debt Ceiling Negotiations in the Past

Republican President Dwight Eisenhower triggered the first debt ceiling crisis by asking for a $290 billion raise from the $275 billion limit in 1953. His request was rebuffed by fiscal conservatives of both parties.

Therefore, conservatives often engage in an annual ritual of refusing to extend the U.S. Federal debt ceiling in an effort to retroactively slash federal spending. Since 1976, there have been 18 government shutdowns as the consequence of a failure to agree upon a budget, enact a continuing resolution to run the government, or increase the debt ceiling. 

There have been heated arguments in every contemporary administration, whether Republican or Democratic.

There has only been one shutdown that lasted longer than five days, and that was in 1995, when a disagreement over spending between President Clinton and House Speaker Newt Gingrich lasted for 21 days despite Gingrich’s pledge to “never shutter the Government.” Because of this, Republicans lost eleven seats in the House of Representatives between 1996 and 1998, giving Clinton his second term in office and giving the Democrats their narrowest lead in the chamber since 1952. (223 Republicans, 211 Democrats).

2011 Debt Ceiling Crisis

The United States’ “borrowing power” will be depleted by early August 2011, as warned to Congress by Treasury Secretary Timothy Geithner in early April 2011.

Since the two parties do not agree on how to best raise revenue and spend public funds, President Obama established the National Commission on Fiscal Responsibility and Reform (also known as the Simpson-Bowles Commission) to find common ground and propose policies that would lead to long-term fiscal stability. It was projected that by 2035, the federal debt could be reduced by $4 trillion and deficits could be eliminated. The final report was released on December 1, 2010.

But the committee members couldn’t reach a consensus, and the final report was rejected by a vote of 4 Democrats and 3 Republicans out of 11. The House voted down a measure that would have implemented the recommendations by a margin of 382 to 38.

Political parties were unable to compromise in the months that followed, holding the raising of the debt ceiling hostage over the expiring Bush tax cuts and how to reduce government spending. The prospect of American involvement in a conflict. When the United States government defaulted on its debts for the first time in history in November 2012, it sent shockwaves through the financial markets and increased the cost of borrowing money by $18.9 billion, according to a study by the Bipartisan Policy Center.

On the verge of a default, lawmakers came to an arrangement that became the Budget Control Act of 2011. By relying on a sequester mechanism that would automatically trigger across-the-board cuts in defense and non-defense programs with specific exemptions for Social Security, Medicaid, civil and military pay, and veteran affairs, the Act aimed to reduce spending by more than the amount of the increase in the debt limit if Congress could not agree on specific cuts.

Credit rating agency Standard & Poor downgraded the United States’ AAA credit rating to AA+ because of the prolonged negotiations and the parties’ apparent unwillingness to fulfill previously authorized government debt. The United States’ credit rating had never been lowered prior to this. While neither Fitch nor Moody’s lowered their ratings, they did both proclaim a negative outlook for U.S. debt, which will almost certainly lead to higher interest rates in the future.

A total of $1.3 billion in extra costs were incurred by the government in FY2011 as a result of the standoff between House Republicans and the White House, according to the GAO.

2012 Fiscal Cliff

The parties in Congress were unable to settle their differences over tax rates and spending reductions during 2012, and the painful provisions of the Budget Control Act were set to go into effect on January 1, 2013. All of the following tax hikes would have been implemented if the parties hadn’t been able to come to an agreement:

  • The temporary payroll tax decrease that was implemented in 2011 has come to an end.
  • Increases in the alternative minimum tax
  • Tax cuts enacted by the previous Bush administration are being “rolled back.”
  • The Affordable Care Act imposes new taxes (Obamacare)

The political impasse would have led to budget cuts across the board for more than a thousand government programs, including Defense and Medicare, in addition to these tax hikes. The term “The Fiscal Cliff” was used to describe these domino effects.

Congress passed two acts to delay the crisis, fearing that the combination of heavy tax increases (if the Bush tax cuts were not extended), severe reductions in government spending due to sequestration, and another protracted battle over the debt ceiling would send the still-recovering economy into a tailspin:

  • The 2012 Tax Relief Act for American Taxpayers. Most of the Bush tax cuts were made permanent by the American Taxpayer Relief Act of 2012, with the exception of the highest income brackets ($400,000 for individuals, $450,000 for joint filers; levels adjusted to future inflation). Similarly, the Act put a two-month hold on sequestration. While Republican House Speaker John Boehner and Senate Minority Leader Mitch McConnell supported the plan, the majority of their party members in the House voted against it.
  • Legislation in 2013 established the no-budget, no-pay policy. The debt limit was temporarily lifted to account for borrowing that happened during the debt ceiling suspension mandated by the No Budget, No Pay Act of 2013 (February 4, 2013–May 19, 2013). Congress also agreed to escrow their money for a period as a public relations gimmick, meaning they wouldn’t get paid until either a budget was enacted by both chambers of Congress or the Congressional session ended. In spite of this, the debt limit was not increased beyond its level on May 19, 2013, and the Federal Government is once again projected to run out of borrowing capacity and finances to pay for previously allowed spending around the middle of October of 2013.

Potential Outcomes

Republican Suggestion

The Republican Party sees the ongoing problem as a powerful tool in their desire to downsize government, while the President would want to eliminate future debt limit rises and possible government shutdowns. According to a recent piece in the National Journal, the Republicans’ current proposal to the President and Democrats will include a number of different choices, none of which, however, would remove debt ceiling constraints from future party politics.

  • Long-Term. In exchange for agreeing to privatize Medicare, the Treasury would gain borrowing permission for the next three and a half years, until the end of Obama’s tenure.
  • Medium-Term. In exchange for agreeing to reduce the Supplemental Nutrition Assistance Program (SNAP) food-stamp program, undertake tax reform, or block-grant Medicaid, the debt limit may be increased until 2015 at the earliest.
  • Short-Term. If there is consensus to implement a means test for Social Security benefits or eliminate specific agricultural subsidies, the debt ceiling might be extended into the first half of 2014.

The Democratic Party has said that the measures are nothing more than a partisan gimmick designed to revive the fortunes of Republican candidates for president and vice president.

Democratic Proposal

The Democrats and President Obama have both stated an interest in reaching a “grand deal” in order to end the current crisis and address the underlying causes of the resulting budget shortfalls. Some of the things they’ve suggested are:

  • Debt limit discussions should be separated from budget negotiations. The Administration has made it clear that the Federal Government’s obligations were incurred with Congress’s permission and must be paid as pledged to maintain the United States’ credit status.
  • Increasing Taxes on America’s Wealthiest. In 2012, the wealthiest 10% of the population collected a record 48.2% of total earnings, making the gap between the richest 1% and the rest of the population the largest it has been since the years preceding the Great Depression. However, the majority of Republicans are members of Americans for Tax Reform, which opposes tax hikes for any purpose.
  • Implementation of the Affordable Care Act continues. Democrats remain unwavering in their opinion that the present healthcare system and its costs are unsustainable and unjust to the vast majority of American residents, notwithstanding their readiness to delay or modify the execution of different legislative provisions.

Potential areas of agreement include reforms to Social Security that would allow for means testing, changes to the chained consumer price index (CPI) that would affect payments, reforms to Medicare that would affect both providers and the insured, and the elimination of “pork barrel” legislative actions.

Bottom Line

Republican and Democratic factions, according to historians, are more apart than they have been since the conclusion of the Civil War. In favor of both sides are radicals and zealots who are prepared to sacrifice all for their cause.

To compromise is seen as a sign of weakness, creating a zero-sum climate where no progress can be made on any of the country’s most pressing problems. Due to internal strife, the government is unable to meet its financial obligations when they come due.

Although a shutdown of the government due to the debt limit in October or November is possible, coupled with significant deterioration of the country’s credit rating, it is more probable that a series of continuing resolutions will occur. By taking these measures, the crisis will be put off until after the 2016 elections, when a new president and Congress will have taken office.

Meanwhile, sequestration will keep cutting federal expenditure and essential government programs, notably those geared to benefit the most vulnerable members of society.

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