Treasury Notes

 A Few Facts to Inform This Week’s Debt Limit Debate

By: Dr. Jan Eberly
1/18/2012

Last August, the President signed into law the Budget Control Act (BCA) of 2011, which locked in roughly $2.1 trillion in deficit reduction – nearly $1 trillion from spending cuts starting in FY2012 and an additional $1.2 trillion in deficit reduction beginning no later than January 2013.

The BCA also increased the debt limit by $2.1 trillion in tranches and offered Congress the opportunity to cast a vote for or against these increases before they take effect.  As a reminder, increasing the debt limit merely allows the government to continue to finance existing legal obligations that Congresses and presidents of both parties have made in the past.  It has no effect on future government revenues, spending, deficits, or debt.

As Members of the House are expected to vote today on the debt limit increase scheduled to occur January 27, this post provides three key charts to inform the discussion about the origin and trajectory of our debt and changes to the underlying size of government in recent years.

Origin of Our Debt

In July 2011, an analysis of Congressional Budget Office (CBO) data showed a $12.7 trillion difference between the $2.3 trillion surplus that CBO projected in January 2001 and the $10.4 trillion in additional debt CBO projected would be added by the end of FY2011.  As Figure 1 shows, this difference was mostly attributable to tax cuts and additional spending enacted under the Bush Administration, which accounted for 55 percent of this growth in debt.  Obama Administration policies, mostly in response to the recession that began in 2007, were responsible for only about 11 percent of that difference, while economic and technical changes as well as debt financing accounted for the rest.

 

Figure 1.

(Click on the image for a full-size version.)

Changes to Government Spending Driven by Temporary Policies and Economic Factors

The financial crisis President Obama inherited has driven most of the recent changes in government spending, through both an increase in automatic stabilizers – outlays that increase during times of economic distress – and temporary policies enacted to stabilize the financial system and support the economy.  Without these policies and economic changes, as Figure 2 shows, government spending would not be substantially larger in FY 2012 than it was in FY 2008.

Figure 2.

011812chart2.png

Source: Department of the Treasury, based on CBO data. (Click on the image for a full-size version.)

Debt Limit Increases are Required under Both Parties’ Deficit Reduction Plans

The President also put forward a plan for Economic Growth and Deficit Reduction last fall.  In addition to supporting growth, this plan would save more than $3 trillion over the next decade, building on the nearly $1 trillion in spending cuts included in the BCA.  If enacted, these savings would stabilize the debt by the middle of the decade as a step toward reducing it.

It is important to remember that under any of the prominent deficit reduction plans that have been introduced – including the House Republican plan – we would still need to increase the debt limit now and for many years to come.  Under the House Republican plan, for example, the debt limit would still need to be increased by more than $1 trillion from today’s level by the end of FY 2012 and by a total of $7.9 trillion above today’s level by the end of FY 2021, as Figure 3 shows.  Moreover, even the House Republican plan would continue to require trillions of dollars in additional debt limit increases beyond that amount over the next several decades.

Figure 3.

Source: Daily Treasury Statement; House Republican Budget, 112th Session (p. 6). (Click on the image for a full-size version.)
 

Conclusion

An increase in the debt limit is needed for the U.S. government to continue to finance the obligations that have been made by Congresses and presidents of both parties on behalf of the American people.  While the President and Congress are committed to bringing down budget deficits as we go forward, we are still responsible for the promises we have made in the form of our existing financial obligations.  Raising the debt limit simply recognizes these obligations.

Dr. Jan Eberly is the Assistant Secretary for Economic Policy.

Posted in:  Debt Limit, Economic Policy
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