The Impasse Over the Debt Ceiling: Biden vs. McCarthy and the Absence of a Budget Constraint

As House Speaker Kevin McCarthy and his Republican colleagues refuse to negotiate an increase in the debt ceiling without a reduction in federal spending, and President Biden and his Democratic colleagues insist that raising the debt ceiling without negotiations is “not negotiable”, the ongoing budget negotiations have reached a deadlock. The key issue at hand is not just the budget, but the lack of an effective budget constraint in the current system.

In theory, the debt limit sets a cap on the amount Congress can borrow and spend. However, in practice, Congress routinely increases the debt limit to accommodate past borrowing and spending, as they are likely to do in the current negotiations as well. The Budget Control Act (BCA) of 2011 was a previous attempt to impose spending constraints in exchange for raising the debt ceiling. It created the Joint Select Committee on Deficit Reduction, which failed to agree on spending reductions but provided a fallback mechanism of sequestration or across-the-board spending reductions.

The BCA also imposed discretionary spending caps based on the “parity principle”, requiring equal reduction in defense and non-defense spending. However, over the past decade, these spending caps have been repeatedly increased and circumvented to accommodate higher spending levels. In 2022, the spending caps expired, and in the FY 2023 Omnibus Bill, Congress abandoned the “parity principle”, resulting in higher defense spending compared to non-defense spending.

With the absence of a fiscal rule imposing a budget constraint, the most likely outcome of the current budget negotiations for fiscal year 2024 is business as usual. Republican and Democratic legislators are likely to compromise and approve higher spending levels, with interest groups supporting higher defense spending having more success than those supporting non-defense spending.

However, the Congressional Budget Office (CBO) has projected that under current law, the national debt will continue to increase and could exceed 200 percent of national income by midcentury, which is deemed unsustainable. The risk of debt default and sharp increases in interest rates loom large as debt levels continue to rise.

In response to this risk, House Budget Chairman Jodey Arrington has introduced HCR 24, a resolution that proposes a constitutional path for states to draft and ratify an Inflation-fighting Fiscal Responsibility Amendment. This resolution, if approved by Congress, would require a vote of the people in 3/4 of the states to approve any proposed amendments. The Federal Fiscal Sustainability Foundation is urging state attorneys general to consider a mandamus case to compel Congress to fulfill its duty as described in HCR 24 and steer the country towards a sustainable fiscal path.

In conclusion, the impasse over the debt ceiling and the broader budget negotiations highlight the absence of an effective budget constraint in the current system. As partisan interests collide and spending levels continue to rise, the need for a fiscal rule to address the unsustainable national debt becomes increasingly urgent.