Background and Summary of Debt Stabilization Act
Background and Summary of Debt Stabilization Act
- The announcement by the Treasury Department that it will exhaust so-called “extraordinary measures” such as dipping into government trust funds to avoid breeching the debt limit by mid-October and estimates that the government could face the potential of default as early as October 18th if the debt limit is not increased highlights two problems which pose a threat to our economic recovery and long term economic growth
- The need for repeated increases in the debt limit is a reflection of the rapid increase in the debt as a share of our economy. Debt cannot continue to grow faster than the economy without risking a fiscal crisis.
- At the same time, the political fights over the past two years about raising the debt limit have harmed market confidence in our government and created noticeable uncertainty.
- Economists generally agree that government debt is a problem if it is growing faster than the economy and is acceptable as long as it is stable or declining as a share of GDP.
- While the need to increase the debt limit can highlight the growth in debt, the need for regular votes to increase the debt limit creates tremendous uncertainty and economic risks. The protracted delay in increasing the debt limit in 2011 contributed to sluggish economic growth in the months leading up to the debt limit, a drop of nearly 2000 points in the stock market, cost taxpayers nearly $20 billion from higher borrowing costs and the first ever downgrade in the U.S. debt.
- The Debt Stabilization Act would address both the economic danger of debt growing faster than the economy and the uncertainty caused by the debt limit by indexing the debt limit to GDP and requiring action by the President and Congress if the debt is growing faster than the economy.
- By indexing the debt limit to GDP, the Debt Stabilization Act provides that Congress would not need to approve legislation increasing the debt limit as long as the debt remains on a stable or declining path as a share of GDP.
- If debt held by the public is projected to be growing as a percentage of GDP, Congress and the President would be required to consider policies to prevent the debt from increasing faster than GDP before a debt limit increase is necessary
- By eliminating the need to increase the debt limit if the debt is stable or declining as a percentage of GDP and putting a process in place for the President and Congress to act to prevent the debt from growing faster than the economy this legislation puts in place a process to avoid the brinksmanship and last minute deals to avoid a default.
- At the same time it would make the need to increase the debt limit a more meaningful indication of fiscal stewardship, because legislation increasing the debt limit would only be necessary if policymakers have failed to keep the debt on a stable or declining path.
Debt Limit Indexation
The debt limit indexation would provide for an automatic increase in the debt limit to allow debt held by the public to increase at the same rate as the economy without causing the debt limit to be exceeded. Specifically, the legislation would:
- Redefine debt subject to limit to apply to debt held by the public, which is the part of the debt directly related to government borrowing to finance deficit spending and considered by most economists to be the more meaningful measure of the impact of debt on the economy. Debt held by government trust funds such as the Social Security trust fund and other retirement trust funds (intra-governmental debt) would no longer be included in debt subject to limit. The current debt limit would be adjusted to exclude the portion attributable to intra-governmental debt.
- Provide that on January 1st of each year the dollar amount of the debt limit in statute would be increased by the percentage increase in nominal GDP over the previous year
- The Secretary of Treasury would be required to notify Congress in writing about the increase in the debt limit, including the total amount of the increase, and how the increase in the statutory limit compares to the actual increase in debt over the preceding year
Debt stabilization trigger
The debt stabilization trigger would provide for an annual review of whether the debt is still on a stable or declining path over the next five years, and set up an expedited process requiring action by the President and Congress if the debt is projected to increase in any of the next five years.
Specifically, the process would:
- Require the President to submit legislative recommendations that would stabilize the debt if OMB projects the debt will grow faster than the economy
- Require the Congressional budget resolution to include instructions for changes in tax and spending law to stabilize the debt if CBO projected that the debt will grow faster than the economy
- If a budget resolution with instructions to stabilize the debt is not adopted by June 15th, the President’s proposal or alternative proposals with a minimum levels of support (50 cosponsors in the House and 10 in the Senate) to achieve savings necessary to stabilize the debt could be called up for a vote by any member
- Congress could not consider any legislation affecting revenues or mandatory spending until it passes legislation bringing the budget back within the targets
- The requirement would be suspended if nominal GDP grew by less than one percent in the prior year or Congress enacts a join resolution stating that stabilization legislation would cause or exacerbate an economic downturn.
Rep. Scott Peters (D-CA) recently introduced the Debt Stabilization Act, which is based on provisions of The Bipartisan Path Forward.