The debt ceiling is one of the most basic functions of the federal government.
It permits Congress to pay its bills. As the Treasury Department reveals year-end balance sheets, the secretary must ensure that the government is able to access Treasury accounts and purchase any necessary Treasury bills to ensure payment of bills (i.e., government spending) by the end of the fiscal year, which must be at the close of business on Sept. 30.
When we hear about the debt ceiling, it tends to conjure images of a pricey government facility – a retirement village for the elderly, a warehouse full of tanks and missiles, a facility to battle stormy weather. And that’s fair: Even during times of significant financial stress in the government, the debt ceiling goes unfunded and the government pays bills in a lump sum.
But the limit on the government’s debt is not about debt accumulation in the short term. Rather, the debt ceiling is about the issuance of new debt. Treasury can only borrow up to the amount that Congress has allowed them to raise. The Treasury secretary then purchases the necessary credit on the open market to cover payments for the previous year. This funding occurs from all available sources. As one of the world’s largest buyers of Treasuries, Japan is the major prop for Treasury debt purchases.
There are limits to what the Treasury can raise in new debt, and that’s why the debt ceiling is one of the most important functions of Congress. (This column is only intended for a general audience, of course.)
According to White House budget projections, the U.S. will hit the debt ceiling on March 2, 2019. On Oct. 17, 2019, the Treasury Department will miss a $15 billion payment to Social Security recipients. Note: This date is an estimate, a guess at what the Treasury can’t make and actually have. As it happens, the Social Security payment will be made on Oct. 24 this year.
This forecast is based on previous statements from Congress – such as that the debt ceiling is not for a specific month and, as the Treasury has threatened, it will set a default before March 2. The Treasury will not be able to borrow to cover the Social Security payment.
Treasury has never missed a payment on time. And the Treasury’s current projections show that there’s no chance that they will miss a payment on time at any time. So, the Treasury will not be in a position to miss a payment on time for years to come. This will be a rare event.
If the debt ceiling is not lifted before March 2, the Treasury says that it will not have enough available cash to make all of its federal payments. The Treasury will be forced to prioritize some of its spending. Since Treasury is supposed to pay the oldest payments first, the missing Social Security payment would first go to debt service payments. Taxes, salaries and the interest on the debt would be paid second. This prioritization creates uncertainty in the financial markets about what comes first in the payment cycle.
The Treasury also indicates that Congress should not pass a debt ceiling increase before the March 2019 deadline, since the Treasury department would be unable to make all of its federal payments, but the Treasury could also miss a payment on time on Oct. 17.
None of these deadlines is without irony. The Treasury Department has long criticized Congress for depriving the Treasury of flexibility to manage its debt. When Congress sets the debt ceiling, it puts limits on these flexibility and the Treasury runs the risk of not paying its bills.
The current situation seems to be a harsh revenge for those lawmakers who voted for the Bush and Obama debt limits to be raised and then were criticized for imprudent spending. For these lawmakers, paying current bills must wait until it’s safe to get the next installment of new debt into play.
The debt ceiling isn’t a fantasy. It has been in place for decades. It’s a tool that Congress can use to gain leverage over the executive branch. It’s a weapon that must be used responsibly.
Jonathan J. Hurwitz is a fellow at the Hoover Institution, a fellow at Harvard Kennedy School and an associate professor of economics at the University of Texas at Austin.