Committee for a Responsible Federal Budget

The Debt Ceiling Returns...and 10 Ways to Reform It

Mar 16, 2015 | Budget Process

The federal government will reach its second Fiscal Speed Bump today, as the debt ceiling will be reinstated after having been suspended since last February. The Treasury Department will be able to push back the actual day of reckoning until the fall with "extraordinary measures," but lawmakers will have to lift it later this year to avoid a default on the debt. At times, raising the debt ceiling has involved unnecessary brinkmanship, but it has often been used as a catalyst to make important fiscal reforms. To further the latter and minimize the former, the Better Budget Process Initiative has proposed ten options to change the debt ceiling to make it a more effective tool for fiscal responsibility while improving financial stability in a new paper entitled "Improving the Debt Limit".

The paper divides the changes into four broad categories: linking debt limit changes to achieving fiscal targets, incorporating the debt limit into Congress's decision making, applying the debt limit to more meaningful measures, and replacing the debt limit with a limit on future obligations. The ten options are below: 

Link changes in the debt limit to achieving responsible fiscal targets

1) Presidential authority to increase the debt limit if fiscal targets are met
2) Presidential authority to increase the debt limit if accompanied by a plan to put debt on a declining path as a share of GDP
3) Suspend the debt limit automatically if fiscal targets are met

Incorporate the debt limit into Congress’s fiscal decision making

4) Automatically increase the debt limit upon passage of budget resolution
5) Require reconciliation instructions to increase the debt limit to accommodate debt levels in the budget resolution
6) Require legislation with significant net costs to include an increase in the debt limit

Apply the debt limit to more economically meaningful measures

7) Subject debt held by public instead of gross debt to the debt limit
8) Index the debt limit to GDP growth, effectively capping debt-to-GDP

Replace the debt limit with limit on future obligations

9) Apply the debt limit to future liabilities and unfunded obligations
10) Replace the debt limit with a “debt cap”

The paper goes into detail on the advantages of these approaches. These ideas would make the debt limit more meaningful, make Congress more accountable for decisions that lead to the need for debt limit increases, create incentives for policymakers to enact fiscally responsible policies before debt is incurred, and limit brinkmanship in eras of fiscal responsibility.

As policymakers confront the debt limit later this year, we hope they consider these options to make the process less painful and more productive. As the paper concludes:

There are numerous options for reforming the debt limit which reduce the risk of a default while providing both carrots and sticks to encourage fiscal responsibility and providing greater accountability in the budget process. Reforms of the debt limit could also make the debt limit a more meaningful measure of our fiscal condition and create a greater link between the debt limit and the policy decisions affecting the debt.

Click here to read "Improving the Debt Limit"

Click here to read more from the Better Budget Process Initiative