Bloomberg News

Obama Against Using Debt Limit to Force Spending Cut: Q&A

January 15, 2013

With as little as a month until the U.S. runs out of money to pay its bills, President Barack Obama warned Republicans in Congress not to use the need for a debt- limit increase to force through new spending cuts.

Obama insisted yesterday he won’t negotiate on raising the debt ceiling because the U.S. has no choice other than to pay for spending it has authorized. Many Republicans in Congress say a boost in borrowing authority must be linked to spending cuts.

The Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion debt limit. In a letter yesterday to House Speaker John Boehner, Treasury Secretary Timothy Geithner said the department expects to exhaust those measures “between mid-February and early March.”

Treasuries gained for a third day as speculation that the dispute between Obama and Congress will slow the world’s largest economy boosted demand for the safest assets. The 10-year yield declined three basis points, or 0.03 percentage point, to 1.81 percent at 8:50 a.m. New York time, according to Bloomberg Bond Trader prices. Bond prices move inversely to yields.

Here are questions and answers about the history of the debt limit and the potential consequences of not raising it:

What is the debt ceiling?

As the U.S. government spends more than it receives in taxes and other revenue, the debt limit is the total dollar amount the U.S. is allowed to borrow to pay its bills. Such borrowing can be used only to pay for spending authorized by Congress.

While other countries have debt limits, some set it as a ratio of the economy -- such as 60 percent of gross domestic product -- instead of a specific amount of currency.

How was the limit created?

Congress and President Woodrow Wilson, a Democrat, created the statutory limit in 1917 to help finance the U.S. entry into World War I. The measure allowed the Treasury to issue long-term securities with lower interest than previous short-term debt.

Does Congress need to raise the debt ceiling often?

The limit was periodically raised since its creation in 1917. Congress increased the debt ceiling to reflect the cost of World War II, and lowered the level after the war ended. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department.

What happened in previous disputes over raising the limit?

In 2002, Deputy Treasury Secretary Kenneth Dam sent a letter to Congress seeking an increase in the debt ceiling. The Senate passed legislation to raise the limit the following May 23, after receiving a Treasury Department warning of imminent default.

Standard & Poor’s lowered the U.S. credit rating in August 2011 after the most recent showdown over the threshold. Obama signed a debt-limit increase plan on Aug. 2, the day Treasury warned the nation’s borrowing authority would expire. That set up the so-called fiscal cliff of tax increases and spending cuts that Congress averted at the start of this year.

What actions can Treasury take to put off a default?

The Treasury uses emergency measures to delay a default as the total value of debt nears $16.4 trillion. On Dec. 28, it stopped issuing the State and Local Government Series securities, which help states and municipalities refinance their higher-cost debt.

On Dec. 31, Geithner announced a suspension of investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. The U.S. can use other measures although when they run out, the Treasury won’t be able to meet all of its obligations.

How would a default affect government obligations?

The government makes about 80 million payments each month, including for Social Security, veterans’ benefits, defense contractors, law enforcement and income tax refunds, said Geithner’s letter to Boehner. Exhausting the emergency measures without raising the debt limit would require Treasury to fund the government with cash on hand, which wouldn’t be adequate “for any meaningful length of time,” Geithner said.

“The nation’s creditworthiness is not a bargaining chip or a hostage that can be taken to advance any political agenda,” Geithner’s letter said.

During the 2011 deadlock, the Treasury considered asset sales, across-the-board payment reductions, and prioritizing some of its monthly payments, according to an Aug. 24, 2012, report by the Treasury inspector general.

How do Republicans respond to the statements by Obama and Geithner?

Boehner, an Ohio Republican, issued a statement yesterday that said, “The American people do not support raising the debt ceiling without reducing government spending at the same time.” He has repeatedly said any debt-limit increase must be matched by an equal amount of spending reductions.

How does the Constitution’s 14th Amendment figure into this debate?

Some Democrats in Congress have urged the president to act on his own authority, saying the amendment gives the executive branch the duty to honor U.S. obligations regardless of a statutory debt ceiling. The post-Civil War amendment says, “The validity of the public debt of the United States” including the cost of suppressing rebellion “shall not be questioned.” Obama has said the administration doesn’t think the president has authority to act unilaterally.

When President Obama served in the U.S. Senate, how did he vote on raising the debt ceiling?

As a senator, Obama voted against a 2006 debt-limit increase, a decision he regrets, White House press secretary Jay Carney said last year.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Kevin Costelloe at kcostelloe@bloomberg.net


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