Federal managers and supervisors generally do not have to
worry about federal debt issues, something typically left
up to politicians and other regulators. However, they do
have to live with the effects of periodic budget crises
influencing their budgets.
For that reason managers and supervisors would benefit from
an understanding of federal debt ceilings, especially
considering the current debt crises as it strains day-to-day
operations and becomes part of the reconciliation bill wending
its way through Congress.
The national debt reached $7.078 trillion a week or two ago,
according to AABPA’s George Krumbhaar and Scott Cox, close to
the current statutory limit of $7.4 trillion. They say
something is going to give and it is unclear just what.
The Debt Limit: Questions and Answers
By George Krumbhaar and Scott Cox
(Krumbhaar and Cox are editors of USBudget.com. USBudget.com
is a division of GalleryWatch, Inc. The article was submitted
to Federal Managers Daily Report by the American Association
for Budget & Program Analysis.)
Last spring, the President signed a joint resolution passed
by Congress increasing the Public Debt statutory limit by
$984 billion to a record total of $7.4 trillion. Last week,
the national debt reached $7.078 trillion.
CBO projected in January (and Secretary of the Treasury
confirmed during Budget release hearings earlier this month)
that the current statutory debt limit will be reached later
this year. An increase to that ceiling later this year would
be the second consecutive year that the debt ceiling has been
raised.
The Debt Limit
Congress sets the statutory debt limit by law (set out in law,
31 U.S.C 3101). The government cannot borrow more than the
statutory limit (currently $7.4 trillion) without new
legislation from Congress establishing the new ceiling. The
idea, more theory than fact, is that it enables Congress to
maintain its oversight of federal finances.
Types of Public Debt
There are two types of public debt holdings:
Debt held by the public: Debt held by individuals, corporations,
state or local governments, and foreign governments, essentially
all units outside of the United States government. Savings
bonds and treasury bills are examples of vehicles for such
debt. Treasury bills are generally purchased at weekly auctions.
Bills that have already been sold at auction can get re-sold in
the securities markets just the way stocks are.
Intragovernmental Holdings: This includes trust fund balances
like Social Security or Medicare, revolving funds, and special
funds; also Federal Financing Bank securities. When a trust
fund, such as the Social Security trust fund, operates in
surplus, its surplus balances much be invested – those excess
balances are invested in federal securities. The securities
are not as visible in business circles like Treasury securities
and savings bonds are in business publications. Instead, they
normally appear as bookkeeping entries at the Treasury
Department and with the fund managers at the Social Security
Administration.
Federal Debt Increases – Good or Bad?
It depends. Imagine a situation where the on-budget deficit is
at zero – i.e., all accounts, excluding Social Security, offset
each other and the Social Security trust funds run a surplus.
When Social Security parks this surplus in Treasury
securities, it increases the amount of federal debt, even
though the rest of the budget may be in perfect balance. Just
because the amount that Treasury owes the Social Security
Trust Funds increases from one year to the next, therefore,
does not mean that the government is “raiding” the Trust
Funds. “Raiding” takes place under different circumstances:
When on-budget accounts show a deficit, thus causing the
government to balance the budget with trust fund surpluses.
In other words, don’t mix the language and concepts of budget
balance with the language and concepts of public debt management.
Another way the public debt can increase, however, is when
the budget runs a deficit, other factors being the same.
Such an increase is merely the consequence of the deficit.
If the deficit is “bad” for other reasons – e.g., it shows no
signs of abating over time – then policymakers should worry;
the worry, however, does not stem from the increase in the
public debt per se but rather from the reasons for the increase.
When Might the Debt Be Too Much?
As a practical matter, “too much” federal debt occurs when the
government can’t find people to buy its securities at a
reasonable price. To use an analogy: If you were a bad credit
risk, lenders might charge you very high interest rates or
even refuse to lend, causing you to stop borrowing and/or to
declare bankruptcy. Governments get into this fix from time
to time – think Mexico in 1998.
If we don’t have to worry about the government having too
much debt, then what’s the point of the statutory debt
limit?
Bumping up against the statutory debt ceiling is more a
legal and political event than it is an economic or financial
one. If there were no statutory ceiling, the government
would still be able to sell its securities to the public
without difficulty. The ceiling, however, is written into
law, and it gives Members of Congress an opportunity to
position themselves whenever it comes up for renewal.
Bottom Line: Look for this politically sensitive issue to
be brought to the forefront in the coming months. Don’t be
surprised if a debt limit increase provision is included in
a reconciliation bill – which cannot be filibustered in
the Senate – as opposed to a standalone bill (such as the
one passed last year).
(Editor