Debt Limit Provisions of a Bipartisan Path Forward
PROTECT THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT
The political fights over the past two years about raising the debt limit have harmed market confidence in our government and created noticeable uncertainty. At the same time, debt cannot continue to grow faster than the economy without risking a fiscal crisis. Our plan would index the federal debt limit so that no further debt ceiling increases are necessary so long as the debt is not growing faster than the economy and establishes a debt stabilization mechanism to ensure Congress and the President act if the debt is projected to begin growing faster than the economy.
INDEX THE DEBT LIMIT
The political fights over the past two years about raising the debt limit harmed market confidence in our government and created economically-damaging uncertainty. At the same time, we understand why those policymakers frustrated with our inability to control the debt have viewed the debt ceiling increase as a vehicle for deficit reduction legislation.
Our plan would put the debt on a clear downward path relative to the economy, which most economists view as the key indicated of sustainability. Given this, we recommend indexing the debt ceiling – ultimately to the growth in gross domestic product (GDP) – so that further increases will not be necessary so long as the debt remains on a downward path as a percentage of GDP.
This policy would make the need to increase the debt limit a more meaningful indication of fiscal stewardship, because it would only be necessary to enact an increase in the debt limit if policymakers have failed to keep the debt on a stable or declining path.
ESTABLISH A DEBT STABILIZATION PROCESS
We believe additional enforcement may be necessary to ensure that the debt-to-GDP ratio is stabilized this decade and remains stable in future years. Specifically, we recommend a backstop to ensure that beyond 2015 the debt-to-GDP ratio is on a stable or downward path. This process would work by requiring all Presidential budgets and budget resolutions to propose a stable or declining debt path as a percentage of GDP and requiring the President to submit and Congress to consider legislation putting debt on a downward path as a percentage of GDP if it is projected to be growing. Such legislation would earn fast-track status to encourage its enactment.
The requirement to enact policies to put the debt on a clear downward path as a percentage of GDP would be enforced by a restriction on the considering of any legislation affecting revenues, mandatory spending, or discretionary spending caps. In addition, the failure of Congress and the President to enact policies to put the debt back on a stable path would require enactment of legislation increasing the debt limit that would highlight the failure to ensure the debt remains stable.
Importantly, this requirement would be suspended in bad economic times, for example if nominal GDP grew by less than one percent in the prior year or Congress enacts a joint resolution stating that stabilization legislation would cause or exacerbate an economic downturn.
These provisions were included in Erskine Bowles and Alan Simpson's April 2013 deficit reduction proposal, A Bipartisan Path Forward to Securing America's Future.