Eakinomics: Flipping the Debt Limit Script

Today, or at least soon, the Senate will vote on the Bipartisan Budget Act of 2019, the House-Senate-White House deal to set spending limits for the next two fiscal years and — importantly — to suspend the debt limit for those two years as well. The latter was the most important element of the agreement, as actually hitting the debt limit would be disastrous for the U.S. and global economy. Indeed, from some angles it looks like tying the budget agreement to the debt limit was the leverage used to pass a larger spending increase than might otherwise have prevailed.

All of this is a bit ironic because the spending will necessitate another, future, increase in the debt limit. So, it is clear that the debt limit has not stopped the accumulation of public debt. It would be a lot better if Congress decided in advance to limit the debt rather than repeatedly be forced to increase the debt limit.

It is evidently in that spirit that two members of the House Budget Committee, William Timmons (R) and Jimmy Panetta (D), have introduced H.R. 4071, with the stated purpose “To amend the Congressional Budget and Impoundment Control Act of 1974 to provide that concurrent resolutions on the budget include the recommended ratio of the public debt to the estimated gross domestic product for each fiscal year covered by the resolution.” In English, the budget resolution would have to contain a target for the debt-to-GDP (gross domestic product) ratio for every year it covers.

This proposal is a deceptively good idea. First, debt-to-GDP is a good indicator of fiscal policy. If a deficit-inducing policy is sufficiently pro-growth, the ratio would register a decline. If not, it would rise. This data point is exactly the kind of information that transforms budget policy into economic policy. Moreover, from a budgetary perspective, it forces the taxes, spending, borrowing, and interest costs to line up in order to meet the target. This proposal is the kind of thinking needed to put the United States on a sustainable fiscal trajectory.

I don’t expect the bill to become law, or the idea to become reality, in the near future. But at some point, the country will face the fact that the federal budget trajectory is an existential threat, and Congress will need every process change like H.R. 4071 to come to grips with the issue.