Committee for a Responsible Federal Budget

Short-Term Debt Ceiling Increases Can Lead to a Deal

Oct 18, 2013 | Budget Process

With President Obama's signature on Thursday morning, the nation went from the brink of default to having a least a little elbow room on the debt ceiling for a few months. The actual date on which the nation would default (the "X date") is uncertain given the question of whether extraordinary measures will be available, but the bill will at least prevent a breach of the debt ceiling through February 7. With extraordinary measures, the Bipartisan Policy Center estimates that Treasury would be able to delay the X date until sometime between late-February and mid-March.

Although lawmakers need to address our unsustainable long-term debt, bringing the nation to the precipice and threatening default are not the way to do so. With enough lead time to avoid scaring markets, however, short-term debt ceiling increases in the past have helped to foster negotiations and achieve significant deals. Extending the nation's borrowing authority through at least February 7 should give lawmakers more time to work out the details for a comprehensive deal to reform entitlements, restore investments, and reform our tax code. The graph below shows that in at least five different budget deals, temporary debt limit increases bought time for and preceded the final deal.

This is not to say that reaching an agreement after a temporary increase is particularly easy, and this can no better be seen than the 1990 Omnibus Budget Reconciliation Act. Negotiations on a budget agreement began in mid-May of 1990. By August 9, a deal still had not been worked out, so the debt limit was temporarily extended to October 2. The initial agreement between President George H. W. Bush and Congressional leaders was rejected by the House, requiring further negotiations and five other debt ceiling extensions in October before a compromise could be reached. On November 5, President Bush signed the Omnibus Budget Reconciliation Act, which raised the debt ceiling by $915 billion, the largest increase in history at the time in nominal dollars. In total, negotiations went on for 139 days, but the result was a deal containing nearly $500 billion in deficit reduction over the next five years, including discretionary spending caps and the Pay-As-You-Go (PAYGO) rule. The agreement played a large role in the budget surpluses of late 1990s, so while the road may have been rocky, it provided significant fiscal gains.

A permanent deal by now would have been preferable, rather than a stopgap measure, but the worst possible outcome would be going over the brink and defaulting. The temporary increase buys some time for lawmakers to work on a fiscal deal, but it's up to them to use it wisely.