NC Budget and Tax Center

Will US House refuse to pay nation’s bills, allow default?

The big news out of Washington yesterday was the growing consensus among certain rank-and-file members of the US House of Representatives that refusing to raise the federal debt limit—the maximum amount that the federal government can legally borrow—and consequently defaulting on the nation’s current debt obligations is a viable path to ensuring significant reductions in government spending. In effect, these members are arguing that Congress should hold the debt limit hostage in exchange for deep spending cuts, and that unless these spending cuts materialize, they will refuse to raise the debt limit and essentially shoot the hostage—in this case, the U.S. economy.

This approach is both irresponsible and unnecessary, as it needlessly puts our nation’s economy at risk without generating any meaningful deficit reduction. On the other hand, however, a balanced approach to deficit reduction that puts our national debt on a sustainable path is much, much closer than the “Default Caucus” would let on, and holding the economy hostage doesn’t get us there.

The consequences of refusing a debt limit increase are very real. As a bipartisan litany of mainstream economists have warned, refusing to increase the debt limit will inflict significant damage to the national economy and likely pitch us into another recession—either by ensuring the federal government defaults on its existing debt or by significantly shrinking current federal expenditures, including payouts to Social Security and Medicare beneficiaries, war-fighting expenses, and on K-12 education, healthcare, highways, and research and development.

Congress could not afford to meet both obligations in full. 

On the one hand, if the Treasury foregoes paying bondholders, the result would be national default, a significant downgrade in in our nation’s credit-rating, and a dramatic increase in interest rates by risk-averse investors.  Given the importance of the dollar as an international reserve currency, the impacts on the stability of the global economy would likely be catastrophic.  And largely ineffective if the goal is deficit reduction, since—ironically—this approach would also likely result in more long-term debt than under the current approach, as future borrowing would cost significantly more than it does now under ultra-low interest rates.

On other hand, the Treasury could attempt to prioritize payments to bond-holders instead and shut down the federal government (which is perhaps the ultimate goal of this “Default Caucus). But if just $120 billion in sequestration spending cuts were expected to reduce North Carolina’s economy by $2 billion, imagine the consequent damage of pulling $3 trillion in federal expenditures out of the national economy over the next year.

In light of this reality, shooting the American economy in order to save it makes no sense—especially when there are other options available to put our nation’s fiscal house in order.  Congress can abandon this profitless brinksmanship with the debt limit and instead pursue a responsible, balanced approach to deficit reduction that avoids treating the nation’s credit rating (and economic recovery) as a bargaining chip, includes new revenues, and doesn’t rely solely on spending cuts that increase poverty and inequality.

Ultimately, most economists agree that we need to achieve about $4 trillion in deficit reduction over the next ten years in order to return the federal debt to sustainable levels relative to the size of the national economy.  In line with past deficit reduction packages over the previous half century, Congress should consider hitting this $4 trillion target through balanced revenue increases and strategic spending cuts—and fortunately, we are already closer to this target than many believe possible. 

In fact, the recent fiscal cliff deal took an important first step to a truly balanced approach by contributing about $650 billion of new revenues towards this deficit reduction target. When combined with the $2 trillion in spending reductions contained in the Budget Control Act of 2011, a report from the Center on Budget and Policy Priorities makes it clear that Congress only needs to find an additional $1.4 trillion in savings over the next 10 years to meet the $4 trillion goal—and return our debt to sustainable levels.

To find the remaining $1.4 trillion in savings, Congress should consider dividing deficit reduction equally between new revenues and spending cuts. On the tax side, Congress should follow the post-election suggestion of House Speaker John Boehner and look for at least another $600 billion in revenues through closing loopholes, deductions, and other special breaks in the personal and corporate income tax codes. Currently, federal revenues as a share of the economy stand at 15.8 percent of Gross Domestic Product, well below the 18 percent historical average since the end of World War II. Bringing revenues back into historical balance are critical to addressing the deficit in a balanced way.

On the spending side, the Biden talks during the summer of 2011 identified a range of spending cuts that could generate the remaining $600 billion necessary—when combined with $200 billion in reduced interest payments on the federal debt—to hit the overall $4 trillion target for deficit reduction. Many of these cuts simply involve finding efficiencies in programs like Medicaid and Medicare, and would not involve benefit cuts—a key factor in ensuring that deficit reduction that does not increase poverty or impact state budgets.

Given that we’re only $1.4 trillion away from hitting our sustainable deficit reduction target, a balanced deficit reduction package is within reach. Holding the debt limit hostage and playing chicken with the nation’s credit rating is both irresponsible and unnecessary.

9 Comments

  1. Alex

    January 15, 2013 at 7:51 am

    Allan, you have to be kidding if you think the Budget Control Act of 2011 cut the deficit by $2 Trillion dollars.It simply addressed the increase in spending that would have normally occurred, and was a worthless piece of legislation..We have already increased the debt by $300 billion in just 3 months for this fiscal year alone, and we’re on target for another Trillion dollar deficit year. We’re no closer to solving this problem than we were 4 years ago.

  2. Frank Burns

    January 15, 2013 at 8:17 am

    I urge Congress to hold the line and not agree to raising the debt ceiling until an equivalent amount of spending cuts are agreed to. Continuing to spend with no budget or plan is irresponsible and cannot be sustained. There better not be any more taxes, as our social security tax just went up. Where is the balance when all you get are more taxes, with no spending cuts and no budget?

  3. Pat

    January 15, 2013 at 10:35 am

    Let’s negotiate Medicare drug prices. Huge savings there. It’s what the rest of the developed world does.

  4. jlp75

    January 15, 2013 at 1:41 pm

    1. The debt limit is for money already spent. Don’t blame the debt limit, blame Congress.
    2. Social Security did not go up. It returned to where it was.

  5. Frank Burns

    January 15, 2013 at 1:52 pm

    JLP,
    The interest on the debt is $30 Billion/month, or $360 Billion per year. The federal receipts per year are $3 Trillion per year. So you can see that there is no default on what we owe. We need to reduce spending to 2008 levels as a target, there is no budget. You are repeating Obama like a tape recorder. Just because he uses deception and lies, does not mean that you should as well.

    http://www.nationalreview.com/articles/337675/spending-spending-kevin-d-williamson#

    Social Security taxes just went up. Take a look at your diminished paycheck this month.

  6. jlp75

    January 15, 2013 at 3:32 pm

    No Frank SS did not go up. Social Security was 6.2%. It was DECREASED to 4.2% for the make work pay credit. That credit expired and the rate reverted to 6.2%. 6.2% = 6.2% last time I checked. Must be something different in Republican math. And the debt limit is for money already spent, I don’t care what Obama said. It is good that he can understand reality though, too bad you can’t. You can calculate all you want but it doesn’t change the fact that Congress has already passed the legislation that appropriated these funds.

    The Republicans want to go to the bar, drink all night, and skip out on the tab. Hopefully the bouncer (voters) will throw them to the curb in 2014.

  7. Frank Burns

    January 15, 2013 at 3:52 pm

    JLP,
    The money to run the federal Departments, grants to study the mating habits of butterflys, free Obama phones, fixing more mosques in Egypt, giving money to Libya, Syria, running NPR and many other places has not been done yet in 2013. In fact there is no budget for them. You see the Democrats in the Senate haven’t been doing their job and neither has Obama in demanding a budget. Those are the items that need to be cut so that we live within our means. You and Obama just don’t understand. Take a look at your paycheck this month and you will see that it will be about $100 less due to increased ss taxes. Oops he claimed he wasn’t going to increase the taxes on the middle class.

  8. david esmay

    January 15, 2013 at 5:07 pm

    Frank are you so cognitively dissonant that you cannot grasp that the reason the debt ceiling must be raised has a direct correlation to the fact that congress, during the Reign of George the Dullard authorized programs such as Medicare part-D, medicare prescription drug program, two wars, etc. and didn’t fund any of them? Then when you couple that with repeated tax cuts and the worst economic disaster since the great depression and the ensuing loss of revenues you have a crisis Congress created for themselves and the country. Spending as a percentage of the GDP is at it’s lowest level since 1950, so new spending isn’t the problem. Oops, you’re a moron and you support a party that over the last 32 years has completely abandoned the notion of fiscal responsibility, if they hadn’t, they might have some credibility, as such, they don’t.

  9. [...] spending.  As a result, Congress managed to avoid default and a potential financial crisis that risked the nation’s creditworthiness and economic recovery. At the same time, however, House leaders promised to use three additional chokepoints in the [...]