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Debt Ceiling: Default Not at Issue, Federal Spending Is

Posted By J.D. Foster, Ph.D. On January 14, 2013 @ 10:52 am In Featured | Comments Disabled

President Obama is expected to make his case for a debt ceiling increase at a press conference this morning. The development comes as House Republicans are reportedly [1] weighing “default” and “government shutdown.” While it’s encouraging that conservatives are gearing up for a fight, it’s important that policymakers and the public keep those two terms straight.

Default. The only way the federal government would default on its debt in the event the debt ceiling remains unchanged is for the Treasury to choose to default—an utterly implausible eventuality. Suggestions to the contrary in the press and elsewhere are simply inaccurate and shameful.

The amount of debt the federal government is allowed to issue is set by statute. Federal spending is similarly established by law. Treasury is at once prohibited by law from issuing additional debt above the limit and obligated by law to spend certain amounts for designated purposes. The Treasury has certain tools it can use to muddle through once the debt ceiling is reached, but these terms are limited and are expected to be exhausted toward the end of February.

If the federal government exhausted its financial management tools, then government spending would be limited to incoming receipts. At that point, the law setting a debt limit and the laws in place directing government spending would conflict—something would have to give.

The legal prohibition on selling additional debt because government borrowing has reached the statutory limit does not translate into an inability to spend (because tax money is still coming in). Thus, the consequences of reaching the debt limit are quite different from the consequences of a “government shutdown” as a result of the inability of Congress and the President to agree on spending.

Government Shutdown. This means certain governmental functions are suspended because the Treasury lacks the authority to spend, not because it lacks the means to spend. Further, a government shutdown applies primarily to those activities funded by what is called “discretionary” spending, essentially the day-to-day operations of the government, as opposed to entitlement spending such as Social Security and Medicare.

Very simply, reaching the debt limit means spending is limited by revenue arriving at the Treasury and is guided by prioritization among the government’s obligations. How the government would decide to meet these obligations under the circumstances is a matter of some conjecture. Certainly, vast inflows of federal tax receipts—inflows that far exceed amounts needed to pay monthly interest costs on debt—would continue. Thus, the government would never be forced to default on its debt because of a lack of income.

Whether the Treasury is required as a matter of law to prioritize incoming receipts to pay interest costs first is an open question. However, there appears to be little doubt the Treasury would do so, and legislation offered by Senator Pat Toomey (R–PA) in the last Congress would have ensured Treasury did so.

There is, therefore, no real question that the Treasury would take the actions necessary to preserve the full faith and credit of the U.S. government and avoid defaulting on debts due. Suggestions that the U.S. would default on its public obligations are irresponsible and wrong.


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URL to article: http://blog.heritage.org/2013/01/14/default-not-at-issue-federal-spending-is/

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[1] reportedly: http://www.politico.com/story/2013/01/behind-the-curtain-house-gop-eyes-default-shutdown-86116.html?hp=t1

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