Looking beyond the current debt crisis, the Obama Administration (and future presidents for that matter) should expect continued stiff resistance from the Congress whenever the ceiling needs to be increased. No one likes to vote for a debt ceiling increase; there’s no clear upside and plenty of down, particularly for members of Congress who were elected promising to hold the line on spending and taxes.
Moreover, the composition of our accumulated debt is incomprehensible; just seems to be a growing miasma of political toxicity – a debt blob. Notwithstanding imaginative, though apparently unworkable, short-term fixes like the platinum coin, there needs to be consideration of ideas beyond the binary choice of Congress either enacting a debt ceiling increase or failing to act and putting the nation into default.
One solution that could resolve the problem, while significantly increasing the transparency of the national debt, would be for Congress to transform the process used to authorize borrowing.
Rather than focusing on the overall debt ceiling and the periodic need to raise it, Congress could authorize borrowing to fund budget deficits one fiscal year at a time.
Such a move would redirect the nature of the debate from honoring previous legal obligations (i.e., paying the bills) to deciding the appropriate level of spending, taxes and borrowing for a given fiscal year. This latter approach would enable Congress to exercise budgetary restraint without jeopardizing the credit worthiness of the U.S. government.
Here’s how you’d do it. Would require some budgetary and cash management acrobatics initially, but once the new process is established it would obviate the need to ever again consider debt ceiling increases.
Step 1 – Liquidate old obligations and exercise better debt control resulting from new spending and borrowing. Agree to a complete bifurcation of budgetary obligations entered into prior to a prospective budget agreement and those to be incurred in the future. For obligations already on the books, provide a permanent authorization to borrow any funds to pay those bills, without the need for further Congressional action. The debt service resulting from those previous borrowings would be considered new spending and budgeted for separately. Basically we’re talking about spinning off the old debts and starting fresh.
Step 2 – Put in place a more transparent borrowing process to address future deficits. Acknowledging the fact that we’re mired in structural budgetary imbalance, the new process would require a mechanism to allow the government to borrow enough to bridge the gap between agreed on spending and expected revenues. Such borrowing authority would fund deficits one fiscal year at a time.
Step 3 – Establish binding borrowing amounts to be authorized for each prospective fiscal year. Require the Congressional Budget Office and the Joint Committee on Taxation to calculate the impact of budgetary and tax decisions made for a particular year and use that analysis to calculate borrowing authority. Such a practice would dramatically increase the importance of revenue estimates for a given year, as is the case with state and local governments. If revenues fail to materialize, spending would need to decrease or rainy funds would need to be established and used. To provide a buffer against unintended consequences, an in-year technical adjustment(s) by CBO and JCT could be permitted to reflect changing macroeconomic and perhaps other conditions. Spending would not be allowed to exceed the level included in the enacted budget unless subsequent spending and borrowing authority were provided through the legislative process.
Step 4 – Track each year of borrowing and associated debt service in separate fiscal cohorts. Significant transparency benefits would accrue as there is currently no readily available way to determine the composition of the debt blob. Would be highly informative to gain and maintain an understanding of our debt drivers.
Step 5 – Never again vote on a debt ceiling increase. See steps 1 thru 4. The only vote authorizing borrowing would be the one to approve the annual budget.
Such an approach would benefit taxpayers, contribute to better fiscal and economic certainty, eliminate a constant source of political acrimony and re-solidify the credit rating of the U.S. government. Those concerned with avoiding default and paying our bills on time should support such a measure. Moreover, those advocating a dollar-for-dollar match between new spending cuts and borrowing should also favor the reform because they would have an opportunity to achieve their goals each year through the budget process. Unlike the platinum coin idea, this solution would require an act of Congress but, once in place, the commitment of the U.S. to pay its bills both now and in the future would be ironclad.
Of course, this approach would ratchet up the importance of getting budgets passed on time, so we’d likely be swapping one dysfunction for another. Nevertheless, the annual budget process is where the borrowing debate properly belongs.
Douglas A. Criscitello is Managing Director at Grant Thornton’s Public Sector Practice and formerly Chief Financial Officer at the Department of Housing and Urban Development. He previously worked on federal budget issues at both the U.S. Office of Management and Budget and the Congressional Budget Office.