The news has recently been dominated by stories describing how Republicans—using their newly-gained control of the House of Representatives—are demanding spending cuts as a condition of extending or suspending the “debt limit.”  Their assertions, which are echoed and amplified by Fox News and other conservative media outlets, are that Biden and the Democrats have spent recklessly and excessively, ballooning the total national debt to record levels.  Extreme measures are required, and that is why Republicans are arguing that spending cuts must be adopted as part of any agreement to suspend or extend the debt limit.  Meanwhile, economists, nonpartisan analysts, and government officials warn of the dire consequences of not extending the debt limit and the US going into default on its existing fiscal obligations.

In this ten-part series, I plan to discuss spending cuts and reforms. I recognize that many Americans—myself included—have concerns about spending, deficits, and the ever-increasing national debt.  At the same time, much of the discussion and debate regarding these issues has been conducted in a highly partisan construct.  Each of the political parties, in conjunction with their respective media allies, have blamed and demonized one another, using incomplete and misleading evidence. Americans have become very divided and angry at one another; and they have also become very cynical about the effectiveness of government and its ability to control spending.  I propose to take a deep dive that I hope will provide an objective framework and some insights about how to proceed.

Demystifying Federal Spending and the Debt Limit

The situation regarding the debt limit and federal spending is complicated, particularly given all of the partisan rhetoric and political posturing surrounding these topics. 

First of all, we need to understand that decisions about spending and the debt limit are separate and are controlled by separate statutes.  Each year, the federal government makes decisions about spending and adopts authorized spending levels and appropriations for a fiscal year (the federal fiscal year is Oct 1 to Sept 30).  Congress adopts these spending actions, typically in the form of a “Consolidated Appropriations Act” which, in turn, is signed by the President.  At times (recently very often), when Congress can’t agree on appropriations in a timely manner, it adopts a “Continuing Resolution” that funds the government at previously adopted levels for a short period of time (usually a few days, weeks, or months).

On the other hand, there are federal statutes that require the federal government to establish a limit on the amount of money it is authorized to borrow to meet its existing legal obligations.  This “debt limit” can’t be exceeded unless Congress acts to increase or suspend the limit. The debt limit does not authorize new spending commitments; rather, it simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have previously agreed to and adopted.  Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents (including 3 under Trump) and 29 times under Democratic presidents (source: US Dept of the Treasury).  Most recently, on December 16, 2021, Congress established the “debt limit” at $31.381 trillion (PL 117-73).

Recent Spending Decisions

As fiscal year 2023 was about to start on October 1, 2022, Congress had still not adopted a spending plan (although extensive negotiations had been underway for months).  Congress thus passed a continuing resolution on September 30 (HR 6833) to fund the government at previous levels until December 16, 2022.  After briefly extending this continuing resolution, the Senate and House came to agreement in late December, and President Biden signed the Consolidated Appropriations Act, 2023 on December 29, 2022 (HR 2617, PL 117-328).  This spending law makes $1.7 trillion in appropriations (includes $772.5 billion for nondefense discretionary programs and $858 billion in defense funding) and will keep the federal government operating until the end of the fiscal year (Sept. 30, 2023).  

It is important to recognize that the Consolidated Appropriations Act 2023 was, in many respects, a bipartisan effort. The vote in Senate was 68 to 29, with 18 Republicans voting to approve.  The vote in the House was 225-201, with nine House Republicans voting for the bill and one Democrat voting against it. It also needs to be recognized, however, that these votes were cast by members of the 117^th Congress, and not the 118^th Congress, which would not be convened until January of 2023.  

Speaker to be Kevin McCarthy and other House Republicans argued strongly that these decisions regarding spending should be made by the 118^th Congress, where Republicans now controlled the House and would have move leverage. They called for a continuing resolution to push the spending decisions into the new year, when the Republicans would be in control of the House. Senate Minority Leader Mitch McConnell and many Republicans in the Senate rejected this strategy and went forward with negotiations.  

Debt Limit Reached – Extraordinary Measures Implemented

Meanwhile, the federal government continued to inch closer to the $31.381 trillion debt limit set in December of 2021. On January 13, 2023, Secretary of the Treasury Janet Yellen advised Congress of this fact, and on January 19 she communicated that the limit had been reached and that she was beginning to take “extraordinary measures” to prevent default. She advised Congress to take immediate action, noting that the “extraordinary measures” might buy some time (until June 5). 

The consequences of a default—which has never yet happened to the US—would be dire.  A recent article in The Balance, “Will the US Ever Default on its Debt” describes the situation succinctly:

“A U.S. debt default is much more than the federal government simply not paying its debt. It would greatly impact the economy and people in the U.S:
–A default would increase interest rates, which would then increase prices and contribute to inflation.
–The stock market would also suffer, as U.S. investments would not be seen as safe as they once were, especially if the U.S. credit rating was downgraded. 
–Several government programs like Social Security and Medicare would be impacted, too. Military wages and even small business owners with federal loans would be at risk in the event of a default. Federal employees wouldn’t be paid and parents expecting a Child Tax Credit payment would get nothing.

These financial impacts would have a major effect on consumer spending and businesses could shut down. Eventually, the U.S. could enter another recession as a result.”

The Balance

A Contest of Wills: What Will Play Out?

While the respective positions of Republicans and Democrats are not fixed or definitively defined, House Republicans are generally demanding that some sort of spending cuts and/or spending reforms must accompany any agreement to extend the debt limit.  Democrats generally argue that it’s reckless and irresponsible to expose the country, the American people, and the world to the consequences of a default in meeting legal obligations.  Instead, they argue, the proper approach is to focus on spending and the regular Budget processes.  They acknowledge there are legitimate differences regarding spending  and are willing to fully consider and debate the Republican concerns in connection with the spending and Budget processes.  

So, let’s look at how this plays out.  If House Republicans adhere to their debt limit demands, this means an agreement regarding spending cuts and reforms must be reached on or before June 5, 2023.  During this time, the Treasury will continue to employ “extraordinary measures” to prevent a default; and some of these actions are likely to be destabilizing.  Also, during this period, the country faces continuing economic instability due to the Fed’s efforts to combat high inflation via a series of interest rate hikes beginning in March of 2022.  The rate hikes are slowly having the desired effect on inflation, but this tough medicine involves cooling the economy and risking a recession.  That threat is growing.  For instance, a Bloomberg survey of economists conducted in December of 2022 indicates a 70% chance of recession in 2023, and the odds of recession have been steadily climbing since June 2022.  

On the other hand, if the decisions on spending cuts and reforms were part of the established spending and Budget processes, the immediate deadline for an agreement would be September 30, 2023, in time for the 2024 fiscal year beginning October 1, 2023.  House Republicans have considerable leverage to exact spending cuts and reforms in that they can prevent passage of any spending package that doesn’t incorporate satisfactory cuts and reforms.  History vindicates this conclusion.  Just go back and look at spending packages and reforms after Republicans captured control of the House in the 2010 midterm elections.  Federal spending, with Obama as President, was relatively flat for seven years.  

House Republicans would be well served to be very careful about demanding spending cuts and reforms as a part of the debt limit extension.  The country’s economic condition is already under stress in connection with the Fed’s effort to fight inflation.  Given the way we practice partisan politics, Democrats could blame a recession early this year on the threat of default instigated by Republican demands in connection with the debt limit.  Also, they should consider the likelihood that Senate Minority Leader Mitch McConnell and the Senate Republicans might not go along with their strategy. Finally, there remains a question about whether enough House Republicans will adhere to the strategy.  If just a handful of Republicans decide the better approach is to work on spending cuts in connection with the regular processes, the debt limit ultimatum strategy will fall apart.  

Based on the foregoing analysis, I would argue the country is better served if the political parties addressed spending decisions and reforms in connection with the regular spending and Budget processes. 

Next in the Series

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