After months of dithering, Washington is finally beginning to grapple with the need to raise or suspend the federal debt limit. The White House has said for months it would not entertain negotiations until House Republicans laid out a coherent negotiating position. Speaker Kevin McCarthy sought to do just that on Monday with a speech at the New York Stock Exchange outlining his party’s vision and urging Wall Street titans to back him up. But it’s becoming apparent that his plan is half-baked and a backup is needed.
McCarthy proposes to make steep reductions in some categories of spending in conjunction with a $1.5 trillion debt-limit increase that should last through March 2024. Although some reductions in spending make sense at a time when loose fiscal policy has contributed to record-high inflation and our nation’s debt remains on an unstainable trajectory, many of the specific cuts McCarthy proposes would be deeply harmful to economic growth. Moreover, the House GOP’s decision to use the threat of defaulting on our nation’s debts if they don’t get their way threatens global financial stability at a precarious point for our economy.
The most aggressive of McCarthy’s proposed policies is a spending cap that would reduce discretionary programs by more than $3 trillion over the next decade. Depending on how these cuts are structured to comply with the GOP’s previous commitments not to reduce spending on Republican priorities, including national defense and veterans benefits, they could result in a real reduction of nearly 60% for most domestic discretionary spending. A majority of that spending is for critical public investments in infrastructure, education, and scientific research, meaning McCarthy’s cuts would likely reduce long-term economic growth. Among other misguided cuts, McCarthy also proposes to “save” money by reversing a recent funding boost to the IRS — but this move will actually increase deficits by making it easier for wealthy Americans to cheat on their taxes.
Beyond the substantive problems with the policies McCarthy is pursuing (and the fact that it may not even have the votes of 218 House Republicans), his proposal cannot be reconciled with Democrats’ reasonable reticence to offer policy concessions in exchange for raising the debt limit. The debt limit does not prevent Congress from authorizing more spending than it raises in revenue, it simply limits the Treasury’s ability to pay for the bills Congress has already incurred. Lawmakers cannot seriously suggest they might not allow the United States government to pay the debts it owes simply because they are unhappy with their own lack of fiscal discipline in running up those debts.
The appropriate resolution would be to raise the federal debt limit by whatever amount is needed to cover the difference between revenues and spending lawmakers negotiate in the normal budget process. But there are two problems with this approach. First, the deadline for annual appropriations is September 30th, and the deadline to raise or suspend the debt limit to prevent default is very likely to come before then. Second, the annual appropriations process only requires consideration of about one third of federal spending — the remaining two thirds of spending, and virtually all tax policies on the other side of the ledger, are functionally on auto-pilot. There is only so much Congress can do to get inflation or debt under control with such a limited outlook.
On Wednesday, the House Problem Solvers Caucus – led by Representatives Ed Case (D-Hawaii), Scott Peters (D-Calif.), and Don Bacon (R-Neb.) – offered a framework that could resolve both of these problems. They propose to suspend the debt limit through the end of the year to remove the immediate threat of default and allow a reasonable near-term deficit-reduction compromise to be worked out in the normal budget negotiation process. This suspension would be paired with the creation of a bipartisan fiscal commission that will produce comprehensive recommendations for addressing the real long-term drivers of our debt. After a new budget is passed, the debt limit will be raised by whatever amount is needed to cover the agreed-upon spending levels until 2025. The next Congress will then be responsible for weighing the commission’s recommendations and future changes to the debt limit.
There is much to like about the Problem Solvers’ proposed framework. It adheres to the Biden administration’s demand that raising or suspending the debt limit not be a hostage held ransom for policy concessions. At the same time, it gives House Republicans a mechanism to force the administration to the table for serious budget negotiations without any reason to use the threat of default as leverage. And as I noted earlier this year, there is also good precedent for this approach: The last major fiscal commission was established by President Obama in exchange for Blue Dog Democrats agreeing to support a federal debt limit increase in 2010.
In his speech on Monday, McCarthy said “Debt limit negotiations are an opportunity to examine our nation’s finances.” Although such an “opportunity” is sorely needed at a time when many leaders in both parties are peddling fiscal fantasy, it shouldn’t involve holding the full faith and credit of the United States government hostage. A two-step solution built around a near-term deal negotiated through the normal budget process and a fiscal commission that develops recommendations to tackle the long-term drivers of our debt makes far more sense.