Treasury’s inability to raise debt limit could cause problems

Introduction

The debt limit, which is the ceiling on Treasury’s ability to pay obligations already incurred, could be reached as early as April.

The debt limit does not control the federal government’s ability to run a deficit or incur obligations, but reflects previously enacted tax and spending policies. If Congress delays raising the debt limit, it will create problems for Treasury.

In the past, Treasury had taken drastic measures to avoid reaching the debt limit, like suspending investments or temporarily divesting securities in federal employee retirement funds, but these actions are not keeping pace with the government’s borrowing needs. Treasury has also postponed the auctions of notes and dramatically reduced the amount of bill outstanding, which compromises the supply Treasury relies on to achieve the lowest borrowing rates over time.

Once the debt limit is reached and these extraordinary measures are exhausted, there could be disruptions in government programs and services, like Social Security beneficiaries not receiving their monthly checks.

If the limit is not increased, Treasury could fail to pay interest on its debt, which could cause higher borrowing rates for the government and public, stress the value of the U.S. dollar, and create disruptions in capital markets.

Analysts and former congressional staff told the Government Accountability Office that they feared that a miscalculation in when the debt limit needed to be increased could trigger a financial crisis in the Treasury market.

“Treasury’s past success at managing cash and debt when near or at the debt limit is no guarantee that it can continue to manage successfully in the future and may be misleading,” the GAO report said.

The current system restricts Treasury’s authority to borrow in order to finance Congressional spending decisions. Other countries tie increases in the federal debt limit to decisions about the budget, which highlights how current spending practices will affect national debt.

FAST FACT: Since 1995, the debt limit has been increased 12 times to the current level of $14.292 trillion. The Congressional Budget Office predicts that debt subject to the limit will exceed $25 trillion by 2021.

Following are other new watchdog reports released by the Government Accountability Office (GAO), various federal Offices of Inspector General (OIG), and other government entities.

HEALTH CARE

• Medicare reimburses blood-testing strips for diabetics, at a cost of $56.2 million in 2007. An estimated $42.2 million was inappropriately paid to suppliers. Millions could have been saved if Medicare had controls ensuring that test strip claims complied with Medicare documentation requirements. (Inspector General DHHS)

MISC.

• The Pentagon is not implementing President Obama’s 2009 directive to overhaul its classification system and reduce over-classification. The Department of Defense, the largest producers of classified government information, has not updated its classification policy since 1997. (FAS)