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According to the Bipartisan Budget Act of 2015 (Public Law 114-74), the current suspension of the debt ceiling expires at the end of the day Wednesday, March 15. Following this date, the US Treasury can avoid defaulting on the federal debt only by using “extraordinary measures.” Indeed, Treasury Secretary Mnuchin sent a letter to Speaker Ryan on March 8, stating that the Treasury will start using these measures on March 16. He also asked Congress address the matter in a way that avoids jeopardizing the full faith and credit of the US government. These measures (i.e., accounting steps) will most likely allow the federal government to make it to early fall before it runs up against a hard ceiling on the debt.
Suspension or No Suspension?
The first question facing Congress on the debt ceiling is whether to set a new debt ceiling or simply to extend the current suspension. What should Congress do? Without hesitation, I recommend that Congress set a new ceiling that aligns with the state of the art balance budget amendment that is being proposed by the States.
Short of eliminating the debt ceiling permanently, extending the current suspension is the most fiscally irresponsible act Congress can possibly take. Fiscal conservatives must recognize, however, that extending the suspension is the easiest thing for Congress to do. It serves to kick the can down the road on fixing the budget. The big spenders will argue that only raising the debt ceiling will still lead to a government shutdown or default on the government’s debt. The use of these scare tactics will be designed to precipitate a fight in Congress the big spenders will use to put in place a policy of permanent deficits and unending increases in the debt. Fiscal conservatives must be prepared to fight back.
Fiscal conservatives should counter by putting a new dollar-denominated ceiling in place, which establishes a ruler for judging whether Congress is taking substantive and effective steps to put the federal government on the path to fiscal responsibility. It can also serve as a stepping stone to getting to a balanced federal budget as soon as 2025.
If Not Suspension, What Dollar Level?
If Congress does not extend the suspension, it must determine the proper amount for a new debt ceiling. I recommend $23 trillion. This ceiling could serve as a stepping stone to putting a powerful, yet plausible, balanced federal budget in place when coupled with the ratification of the state-of-the-art balanced budget constitutional amendment now proposed by the Compact for a Balanced Budget, which is the official organization of states authorized to advance this amendment to ratification.
Here is how this could work. The Congressional Budget Office (CBO) released in January 2017 a budget forecast that projects that the “debt subject to limit” will reach $23 trillion during fiscal year 2020. This debt stood at roughly $19.5 trillion at the end of the last fiscal year, in 2016. Assuming the CBO forecast is accurate, increasing the debt ceiling to $23 trillion will give the federal government some three years to get its fiscal act together.
Pathway to a Balanced Budget
During this three-year period, with action by Congress required by the Constitution, the Compact states will advance their amendment to ratification. Assuming such ratification takes place around the end of fiscal year 2018, a new constitutional debt limit will be established under the amendment at roughly $24.15. The precise amount depends on a number of factors, but, most importantly, it is contingent on the prevailing rate of economic growth and the amount of fiscal discipline exercised by the federal government during the intervening time. Included in this new debt limit and authorized by the Balanced Budget Amendment would be line of credit available to fund military conflicts, national emergencies, and normal business cycle fluctuations. In addition, obligations of the federal government in the form of treasury securities held by the Social Security, Medicare, and other trust funds would be honored under the relevant provisions of the amendment.
As Trump Administration policies for accelerating US economic growth through pro-growth tax reform and regulatory reform succeed, the new constitutionally-determined debt limit will not be breached if Congress exercises reasonable discipline in terms of controlling spending. With 5-7% annual growth, the budget could be balanced as early as 2025. What a wonderful final departing gift of the new administration that would be and a testament to the states for their insistence on fiscal responsibility at the federal level.