The U.S. Debt Limit: A Biannual Debate

Summer 2023 Issue
By: Eric Schmutz
Congressional debates over debts and spending are nearly as old as the country itself.

Commercial real estate could face major repercussions from political battles over spending and debt.

There is a familiar rhythm to partisan political debates in Washington, D.C. Elections are held in even-numbered years, when candidates are busy campaigning while trying to paint their political opponents as reckless and irresponsible about governance. In odd-numbered years, policymakers in Washington are busy trying to paint the other party as reckless and irresponsible about taxes, spending and the U.S. debt limit.

Which bring us to 2023, when this divided government just wrapped up a fierce partisan debate about taxes, spending and — the U.S. debt limit. This fiscal struggle can be traced back to the system of checks and balances in the Constitution. It gives the president administrative authority over the federal government, but control over how those operations are paid for — the “power of the purse” — was given to Congress in Article 1, Section 8. Debt limit debates have been common ever since.

The federal government normally runs a deficit, and historically it has not reached a crisis level. In fact, from the end of World War II until 2012, the national debt remained below 100% of the Gross Domestic Product (GDP) threshold, only achieving surpluses in 1999-2001 due to increased revenues from the tech bubble. Unfortunately, the terrorist attacks of September 11, the Bush tax cuts, the Great Recession and COVID-19 pandemic have increased deficit spending and required regular debt increases. The result is that the national debt is now more than 120% of GDP.

The national debt and the annual federal deficit are often confused during debt limit debates, but the difference is simple. The national debt is the total amount of money that the federal government owes, and the federal deficit is the amount of money that the federal government spends in a fiscal year in excess of the revenue it receives. The result is that the national debt increases each year the federal government runs a deficit. The federal deficit was $984 billion in 2019, and prior to the approval of the COVID-19 pandemic emergency spending, the projected deficit was $1.2 trillion in fiscal year (FY) 2024.

‘Extraordinary Measures’

The first salvo of this year’s debt limit conflict was fired on January 13, six days after the 118th Congress was sworn in. U.S. Treasury Secretary Janet Yellen informed the new Congress that the federal government would exceed its borrowing authority of $31.38 trillion (an amount authorized by Congress in December 2021) and would begin “taking extraordinary measures” on January 19.

That sounds dire, but implementing extraordinary measures has become a common practice in debt-limit skirmishes. It gives Congress and the president additional time to negotiate and reach an agreement before the government would default on its debts. The last several iterations have included the declaration of a debt issuance suspension period, suspension of reinvestment of contributions to the Government Securities Investment Fund (G Fund) of the Federal Employees Retirement System, suspension of invested balance in the Exchange Stabilization Fund, and the suspension of state and local government securities.

While the rhetoric of debt limit debates often gets heated, they are usually resolved before the extraordinary measures run out. But in 2011, this was not the case, resulting in the U.S. credit rating being reduced from AAA to AA+ and causing disruption in financial markets. Days later, the 2011 Budget Control Act, which increased the government’s borrowing authority and reduced projected spending (commonly known as sequestration), became law.

On June 3, President Joe Biden signed the legislation to suspend the debt limit until January 1, 2025. This measure caps nondefense spending in fiscal year (FY) 2024 at $703.7 billion (roughly the same level as FY 2023) and $710.7 billion in FY 2025. Defense programs in FY 2024 will receive a 3.3% increase from the FY 2023 level ($886.3 billion) and will be funded at $895.2 billion in FY 2025. Although these caps are projected to save an estimated $1.5 trillion over the next 10 years, when compared to the previous budget projections, the national debt is still expected to grow by $20 trillion over that period.

In these debt limit fights, a failure to reach an agreement to increase the limit always raises the risk of major damage for commercial real estate. There would be significant market disruptions that restrict access to credit and further exacerbate current global recessionary trends. In addition to placing greater economic pressure on tenants, the banking system holds an estimated $1.3 trillion in federal securities. If the Treasury were forced to default on the payments owed on its debt, it would create a major banking crisis, restricting developers’ access to capital.

The Federal Debt Is Still a Problem

Raising the federal borrowing limit may avoid a broad economic crisis, but it empowers the Treasury Department immediately to sell bonds and raise money from the private sector, potentially crowding out investment credit for non-government borrowers in the near term. In addition, the reduction of deficit projections only slightly delays the future fiscal challenges that the nation will face as more seniors retire and start collecting Social Security and Medicare benefits. This means that without significant reforms, Medicare benefits will need to be reduced in approximately five years and Social Security will only be able to cover 80% of its obligations within the next 13 years.

Regardless of what happens in any debt-limit standoff in the future, discussions will necessarily continue on how to mitigate the challenges presented by our ever-increasing national debt. Expect to keep hearing more proposals to increase taxes, including on commercial real estate.

Eric Schmutz is director of federal relations for NAIOP.