For example, the  Congressional Budget Act of 1974 requires that Congress include the levels  of debt implied by the spending and revenue levels in the budget  resolution for the next 5 years and allows for specific estimates of the  increase in debt subject to the limit. Since 1995, the debt limit has been increased 12 times. The amount potentially provided by the extraordinary actions for a  1-month DISP in fiscal year 2010 was less than the monthly increase in  debt subject to the limit for most months of the year. G-Fund growth results from an increase in federal employee retirement  funds being invested in Treasury securities. Approaching the Debt Limit Can Add Uncertainty in the Treasury Market

		Postponed Auctions and Other Disruptions May Lead to Increased Borrowing Costs

Some of the actions Treasury takes to manage the amount of debt as it  approaches the debt limit disrupt the regular and predictable auction  schedule that Treasury relies on to promote liquid markets and finance the  government’s borrowing needs at the lowest cost over time. Conclusions

The debt limit does not control or limit the ability of the federal  government to run deficits or incur obligations. Rather, it is a limit on the  ability to pay bills incurred. Debates surrounding the debt limit may raise awareness  about the federal government’s current debt trajectory and also provide  Congress with an opportunity to debate the fiscal policy decisions driving  that trajectory. Failure to raise the debt limit could lead to serious negative consequences  in the Treasury market and for the ability of the United States to finance  federal debt at the lowest cost over time. So too some of the actions  Treasury takes to manage the amount of debt near the debt limit, such as  reducing the size of auctions, can compromise the certainty of supply that  Treasury relies on to achieve the lowest borrowing cost over time. In  addition, managing debt near the debt limit diverts Treasury’s limited  resources away from other cash and debt management issues at a time  when Treasury already faces significant challenges in lengthening the  average maturity of its debt portfolio, which reduces rollover risk and  uncertainty about future interest payments. As a result, once debt is at the  debt limit, Congress will likely have less time to debate raising the debt  limit before there are disruptions to government programs and services  and to the Treasury market. Better alignment could be possible if decisions about the debt level occur  in conjunction with spending and revenue decisions as opposed to the  after-the-fact approach now used. It might  also facilitate efforts to change the fiscal path by highlighting the  implications of these spending and revenue decisions on debt. To avoid these potential disruptions to the Treasury  market and to help inform the fiscal policy debate in a timely way,  Congress should consider ways to better link decisions about the debt  limit with decisions about spending and revenue. They also provided technical  comments, which we incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) describe the actions that the Department of the  Treasury (Treasury) has taken to manage debt near the debt limit and  challenges that arise, (2) analyze the effects that approaching the debt  limit had on the market for Treasury securities, including Treasury’s  borrowing costs, and (3) in light of the disconnect between the debt limit  and the policy decisions that have an effect on the size of federal debt,  describe alternative triggers or mechanisms that would permit  consideration of the link between policy decisions and the effect on debt  when or before decisions are made. We conducted semistructured  interviews with budget and legislative experts.
Why GAO Did This Study

GAO has prepared this report to assist Congress in identifying and addressing debt management challenges. Since 1995, the statutory debt limit has been increased 12 times to its current level of $14.294 trillion. The Department of the Treasury (Treasury) recently notified Congress that the current debt limit could be reached as early as April 5, 2011, and the Congressional Budget Office (CBO) projects that under current law debt subject to the limit will exceed $25 trillion in 2021. This report (1) describes the actions that Treasury traditionally takes to manage debt near the limit, (2) analyzes the effects that approaching the debt limit has had on the market for Treasury securities, and (3) describes alternative mechanisms that would permit consideration of the link between policy decisions and the effect on debt when or before decisions are made. GAO analyzed Treasury and market data; interviewed Treasury officials, budget and legislative experts, and market participants; and reviewed practices in selected countries.

What GAO Found

The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred. While debates surrounding the debt limit may raise awareness about the federal government's current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies. Delays in raising the debt limit create debt and cash management challenges for the Treasury, and these challenges have been exacerbated in recent years by a large growth in debt. In the past, Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the statutory limit. However, the extraordinary actions available to the Treasury have not kept pace with the growth in borrowing needs. For example, unlike the past, the amount potentially provided by the extraordinary actions for 1 month in fiscal year 2010 was less than the monthly increase in debt subject to the limit for most months of the year. As a result, once debt reaches the limit, Congress will likely have less time than in prior years to debate raising the debt limit before there are disruptions to government programs and services. This trend is likely to continue given the long-term fiscal outlook. Failure to raise the debt limit in a timely manner could have serious negative consequences for the Treasury market and increase borrowing costs. Also, some of the actions that Treasury has taken to manage the amount of debt near the limit add uncertainty to the Treasury market. In the past, Treasury has postponed auctions and dramatically reduced the amount of bills outstanding, which compromised the regularity of auctions and the certainty of supply on which Treasury relies to achieve the lowest borrowing cost over time. GAO's analysis suggests that borrowing costs modestly increased during debt limit debates in 2002, 2003, and most recently in 2010. In addition, managing debt near the debt limit diverts Treasury's limited resources away from other cash and debt management issues at a time when Treasury already faces challenges in lengthening the average maturity of its debt portfolio. Observers and participants suggested improving the link between the spending and revenue decisions that drive debt and changes in the debt limit. Better alignment could be possible if decisions about the debt level occur in conjunction with spending and revenue decisions as opposed to the after-the-fact approach now used. This practice, which is similar to practices used in some other countries, might facilitate efforts to change the fiscal path by highlighting the implications of tax and spending decisions on changes in debt. To avoid potential disruptions to Treasury markets and help inform fiscal policy decisions in a timely way, Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue. Treasury provided technical comments on a draft of this report, which GAO incorporated as appropriate.