2023 United States debt-ceiling crisis

See also: Macroeconomics

Discussion: 2023 United States debt-ceiling crisis

What is it?

The debt ceiling is the legal limit on the total amount of federal debt the government can accrue. The limit applies to almost all federal debt, including the roughly $24.6 trillion of debt held by the public and the roughly $6.8 trillion the government owes itself.

The federal debt ceiling was last raised in December of 2021 by $2.5 trillion to $31.381 trillion, which lasted until January 19, 2023.

The debt ceiling was first enacted in 1917 through the Second Liberty Bond Act and was set at $11.5 billion to simplify the process and enhance borrowing flexibility. In 1939, Congress created the first aggregate debt limit covering nearly all government debt and set it at $45 billion, about 10 percent above total debt at the time. Since the end of World War II, Congress and the President have modified the debt ceiling more than 100 times, according to the Congressional

Research Service.

https://www.crfb.org/papers/qa-everything-you-should-know-about-debt-ceiling#how%20bad

Extraordinary Mesuares

Secretaries of the Treasury in both Republican and Democratic administrations have exercised their authority to take certain extraordinary measures in order to prevent the United States from defaulting on its obligations as Congress deliberated on increasing the debt limit.

• Redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund
• Suspending reinvestment of the Government Securities Investment Fund
• Suspending reinvestment of the Exchange Stabilization Fund
• Suspending sales of State and Local Government Series Treasury securities

Other alternatives to avoid a default

These alternatives are not very likely and risky for the US, but they could present an alternative in a case of a default.

• 1 trillion platinum coin: Under the proposed scheme, the Treasury would mint a $1 trillion coin, deposit it at the Fed, and then draw the money to pay the country’s bills. But Janet Yellen has already dismissed the idea, saying the FED may not go along with such a plan.
• Premium Bonds: the government would renew old, expiring bonds at higher coupon rates. Doing so would not technically add to the nation’s debt. But even some proponents of premium bonds acknowledge that it could face legal challenges or damage the United States’ reputation in the eyes of investors.
• The 14 Amendment: would leverage a clause in the Constitution that says that the validity of public debt should not be questioned. The move would draw an immediate court challenge and could sow uncertainty in the bond market

Republicans Bill

The bill would suspend the debt ceiling through either March 31, 2024 or a $1.5 trillion increase from the current $31.4 trillion ceiling - whichever comes first. CBO finds the bill would save $4.8 trillion through FY 2033, with about $4.2 trillion of policy savings and $543 billion of interest savings. As a result, debt as a share of GDP would rise less than half as fast as currently projected – from 98 percent of GDP to 106 percent by FY 2033, compared to 118 percent of GDP projected under current law.

What's in the Limit, Save, Grow Act of 2023?

Policy	Ten-Year Savings
Return discretionary spending to FY 2022 level in FY 2024, then grow 1 percent annually for a decade	$3.2 trillion
Repeal energy tax credits and spending	$540 billion
Prevent student debt cancellation and IDR expansion	$460 billion
Expand work requirements in Medicaid, SNAP, and TANF	$120 billion
Rescind unused COVID relief funds	$30 billion
Enact reforms related to energy regulations and permitting	$3 billion
Repeal mandatory IRS funding for enforcement, operations, and customer service	-$120 billion
Require Congressional approval of major rules and regulations	unknown
Total Policy Savings	$4.2 trillion
Interest	$543 billion
Total Savings	$4.8 trillion

Default Consequences

Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn ensuing from a political impasse lasting even a few weeks would be comparable to that suffered during the global financial crisis

• Real GDP would decline almost 4% peak to trough
• Nearly 6 million jobs would be lost, and the unemployment rate would surge to over 7%
• Stock prices would be cut almost in one-third at the worst of the selloff, wiping out $12 trillion in household wealth.
• Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates would not fall back to where they were previously

Their reasoining comes from these factors:

• Loss of confidence in consumer, business, and investor confidence. Loss of confidence leads to decrease spending and investing, and credit growth from financial institutions
• Even a few weeks default would mean severe gov spending cuts per week, and the hit to the economy as these government spending cuts cascade through the economy would be overwhelming
• Uncertainty will push interest rates higher even after the debt ceiling is resolved, due to the fall in confidence in the US risks-free status. In 2011, the Treasury debt even lost its AAA rating from the credit rating agency Standard & Poor’s due to governance concerns raised by the political dysfunction.
• They are taking into account the economy is already slowing and probably going into recession, so the timing is already very bad for this to happen. If we add these additional factors to an already slowing economy, the economic risks become greater

Debt Ceiling Deal 2023

On Wednesday May 31 2023, 165 Democrats joined 149 Republicans in approving the 99-page bill to raise the debt ceiling, allowing it to pass the House by the required simple majority.

What is in the deal?

The agreement would suspend the nation’s $31.4 trillion debt limit through January 1, 2025, meaning debt can grow beyond the ceiling. This removes it as a potential issue in the 2024 presidential election.

Caps non-defense spending

Under the deal, non-defense spending would remain relatively flat in fiscal 2024 and increase by 1% in fiscal 2025. After fiscal 2025, there would be no budget caps. The White House estimates government spending would be reduced by at least $1tn.

• The cap for 2024 would be about $704 billion, of which $121 billion would be for veterans’ medical care and $583 billion would be for other areas.
• Adjustments would bring the resources available for spending outside of veterans’ medical care to $637 billion for the coming fiscal year, compared to $638 billion for the current one.
• Defence spending would increase to $886bn, which amounts to a 3% rise on this year.

Protects veterans’ medical care

The deal would maintain full funding for veterans’ health care and would increase support for the PACT Act’s toxic exposure fund by nearly $15 billion for fiscal year 2024

Expands work requirements

The agreement calls for temporarily broadening of work requirements for certain adults receiving food stamps.

• The agreement would increase the upper limit of the mandate to age 55 in phases, from age 49.
• The deal would also expand exemptions for veterans, people who are homeless and former foster youth in the Supplemental Nutrition Assistance Program
• All the changes would end in 2030.
• The agreement would also tighten the current work requirements in the Temporary Assistance for Needy Families program

Claws back some Covid-19 relief funds

The deal would rescind roughly $28 billion in unobligated funds from the Covid-19 relief packages that Congress passed to respond to the pandemic

Cuts Internal Revenue Service funding

• The deal would repurpose $10 billion from fiscal 2024 and another $10 billion from fiscal 2025 appropriations to be used in non-defense areas

Restarts student loan repayments

Under the deal, borrowers would have to begin paying back their student loans at the end of the summer

Maintains climate and clean energy measures

The agreement would not make any changes to the Inflation Reduction Act’s climate and clean energy provisions

Expedites pipeline in West Virginia

The agreement would also speed the creation of the Mountain Valley Pipeline, a natural gas pipeline in West Virginia.

Economic Consequences

Despite the caps in spending, the debt ceiling deal will have a very small or limited effect on the economy.

Analyst Estimates

1. Goldman Sachs expect the deal to reduce federal spending by as much as 0.2% of gross domestic product per year over the two years of the deal, compared with their baseline estimate. . “The boost to funding Congress approved late last year for FY23 was so large (nearly 10% year over year) that overall discretionary spending is likely to be slightly higher in real terms next year despite the new caps,” Goldman Sachs economists wrote in an analyst note.
2. Pantheon Macroeconomics, expects the deal to reduce GDP growth by about 0.2% in 2024 and by a further 0.1% in 2025, which are “well within the margin of GDP measurement error.”
3. EY-Parthenon’s chief economist, estimated that the proposed deal would have a 0.3% drag on real GDP in 2024 and lead to 250,000 job losses

2011 Debt Ceiling Episode

Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on August 2, 2011.4 This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments. In return, the act included $900 billion in slowdowns in planned spending increases over a 10-year period. It also established a special committee charged with finding at least $1.5 trillion in additional savings.

• In the first phase, a $400 billion increase would occur immediately, followed by another $500 billion unless Congress disapproved it.
• The second phase allowed for an increase between $1.2 trillion and $1.5 trillion, subject to Congressional disapproval as well.

US Rating Downgrade

On August 5, 2021 Credit rating agency Standard & Poor's downgraded the credit rating of the United States, from AAA to AA+.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good “down payment” on fixing America’s finances.

S&P ruled that the U.S. fell short: "The downgrade reflects our opinion that the ... plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed."

The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941,

Market Consequences

• 10Y U.S. Treasury yields were already falling, from a peak of 3.73% in early February 2011 to 2.94% by July 28. They then fell by an additional 122 basis points (bps) to 1.72% by late September. 30Y U.S. Treasury yields fell by a similar amount.
• 2Y yields didn’t move as much, with yields falling from 0.85% in early February 2011 to a low of 15 bps by mid-September.
• From its peak at the end of April 2011 to its low in early October 2011, the S&P 500® shed 19.4% of its value
• Russell 2000 losed 29.6%, the S&P MidCap 400 fell 26.6% and the S&P SmallCap 600 losed 26.7%. The tech-heavy Nasdaq 100 was the outperformer, losing a relatively low 16.1% peak to trough.

Differences 2011 and 2023

• With respect to the fixed-income markets, in 2011 the Fed had rates in the range between 0-0.25%, and was conducting quantitative easing (QE). Zero rates likely prevented much of a rally in short-term rates while QE may have encouraged the flight to quality into longer-term bonds.
• Equity valuations are much higher today than they were in 2011. When the market peaked on April 29, 2011, the S&P 500 market cap was 79% of GDP. By October 3, 2011, it had fallen to 62%. As of April 14, 2023, the S&P 500 market cap amounted to 141% of GDP, roughly twice its 2011 levels.
• In 2011, inflation was low and stable at around 2%, while unemployment was very high at around 9%. Today, unemployment is at 3.5% while core inflation is 5.6%, still significantly above the Fed’s target. This could make it very difficult for the Fed to cut rates.
• Public debt now amounts to 113% of GDP compared to 87% of GDP in 2011.
• Going into the 2011 budget debate, the Federal budget deficit was around 9.3% of GDP and was in the process of shrinking towards 8% by year’s end. As of March 31, 2023, the Federal budget deficit was 7.1% of GDP.