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Blocking Increase In Debt Limit Could Backfire, Says New Report

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DEBT LIMIT INCREASE
AP

Republican lawmakers are threatening to vote against raising the federal debt limit this spring unless Democrats agree to dramatically cut government spending.

But far from lowering the national debt, the only practical effect of such a move would be to raise the government's borrowing costs -- and make the toll of paying off the debt that much worse -- according to a new report.

"Failure to raise the debt limit in a timely manner could have serious negative consequences for the Treasury market and increase borrowing costs," concludes a report from the Government Accountability Office.

"Any delay in raising the debt limit that affects Treasury's regular and predictable schedule of auctions can create uncertainty in the Treasury market," the reports says. Various actions Treasury would take to manage the amount of debt as the limit approached could also "compromise the certainty of supply that Treasury relies on to achieve the lowest borrowing cost over time," the report says. "This uncertainty can, in turn, raise the cost of financing the federal debt."

The report also concisely explains how the whole concept of refusing to increase the limit is simply political theater:

While debates surrounding the debt limit may raise awareness about the federal government's current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies.

Advancing an alternate approach, the report passes along a suggestion from "observers and participants" that decisions about the debt level should in the future "occur in conjunction with spending and revenue decisions" as opposed to after the fact.

The Treasury Department recently notified Congress that the current $14.3 trillion debt limit could be reached as early as April 5.

The department can buy some time both before and after the debt limit is hit, by taking such extraordinary steps as temporarily disinvesting securities held as part of federal employees' retirement plans, and using that money to meet other government obligations instead.

But according to the GAO, because the debt has grown so large, those options will buy less time than they have in the past:

Assuming current borrowing trends, our estimates show that the borrowing capacity provided by the extraordinary actions would be sufficient to meet the government's borrowing needs for as little as a few days to a few weeks during certain times of the year.

After that, the results could be dire:

Treasury is not authorized to issue new debt and could be forced to delay payments for government services or operations until funding is available and could eventually be forced to default on legal debt obligations.

Playing chicken with the debt limit was strongly discouraged:

Analysts and observers -- including former congressional staff -- expressed concern that a miscalculation in when the debt limit needs to be increased by could trigger a financial crisis in the Treasury market.

Jason Furman, deputy director of President Obama's National Economic Council, told a lunchtime audience of policymakers on Tuesday:

We fully expect the debt ceiling to be raised. It is something that congressional leaders from both chambers from both parties have said and the president has obviously [stressed its importance]. So this is not an issue we expect to have to face. [Treasury] Secretary [Timothy] Geithner wrote a letter where he outlined some of the consequences... It would have huge, long-lasting ramifications for the United States economy, for our ability to fund our government, for many obligations the government has for foreign creditors, senior citizens, contracts the government writes with people, for goods and services and the types of investments we have made.

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Sam Stein contributed to this report.