In what has become an almost regular event, Congressional leaders and the White House averted economic catastrophe, agreeing to lift the debt ceiling just days ahead of what would have been an unprecedented U.S. default. President Biden and Republican congressional leaders agreed on a package that included some spending cuts in exchange for a two-year suspension on the amount of money the government can continue to borrow. Linda Bilmes, the Daniel Patrick Moynihan Senior Lecturer in Public Policy, is a public finance and budget expert, and as a former assistant secretary and chief financial officer of the Commerce Department in the Clinton administration, she is a veteran of the budget battles between Clinton and congressional Republicans in the 1990s. Bilmes, an affiliate of HKS’s Mossavar-Rahmani Center for Business and Government, Ash Center for Democratic Governance and Innovation, Belfer Center for Science and International Affairs, Taubman Center for State and Local Government, and Center for Public Leadership, shared her thoughts on the recent resolution to this conflict and her perspective on what it all means.  

 

Q: The ink is still drying on the debt ceiling deal, but do you have any initial thoughts on the content and compromises of the bill, or the process used to arrive at it?  Does anything stand out to you, and why?

What stands out most is how much time, energy, and intellectual capital were wasted on simply not driving off a cliff. This debt default cliff had been visible for months, but it took an extraordinary effort to get Congress to apply the brakes. 

Regarding the actual content, it was modest. The proponents of the “Fiscal Responsibility Act” (FRA) claim it will save up to $1 trillion. But most of those savings will not materialize. There isn’t much unspent COVID-19 money because every mayor and governor in the country saw what was happening in Washington and made sure to allocate those funds. The additional work requirements for the Supplemental Nutrition Assistance Program (SNAP) are unfortunate, but they are unlikely to save much money. And the cuts to the IRS will undercut any savings because investing in the IRS actually helps to raise revenue and reduce deficits. In short, the consequence of this agreement is that a few government agencies will grow a little more slowly this year, but the bill didn’t address any of the underlying drivers of the national debt—which include rising military expenditures, war spending through off-budget “emergency” money, growing entitlement expenditures due to population demographics, and debt service, which is related to interest rates.

The only potential sleeper in the FRA is the change to permitting. There is no good reason why this issue was addressed in debt ceiling legislation, but the bill overhauls the National Energy Policy Act (NEPA) by putting a time limit on environmental and other studies which have often delayed energy projects. Originally this section would have addressed electric transmission lines which are critical for linking solar and wind power to the grid, but it was scaled back to include only “studying” the issue. Even so, the bill makes serious reforms to the process of permitting which may harm clean energy projects or fossil fuel projects or both—it is too early to tell, which is why I consider it a sleeper. It also expedited approval for the Mountain Valley gas pipeline in West Virginia, which was a sweetener for Senator Joe Manchin and the fossil fuel industry.

Linda Bilmes.

“The main problem with the debt ceiling is that it is being used as a forcing mechanism to tackle resource allocation because of the failing budget system.”

Linda Bilmes

Q: The United States has repeatedly faced the need to raise the debt ceiling. What are some potential long-term solutions or changes to the current system that could help mitigate the recurring need for debt ceiling increases and provide more stability to the fiscal management process?

The debt “ceiling” has long outlived its purpose. It was enacted in 1917, during World War I, to enable the Treasury Department to issue bonds and take on debt without specific Congressional approval for each item. In other words, it was a wartime provision enacted more than a century ago at a time when the United States was a much smaller economy.

The reason the debt ceiling has precipitated a crisis four times in the last 20 years—2011, 2013, 2017, and 2023—is that the regular Congressional budget process is dysfunctional. The budget breakdown can be traced back to the post-Watergate budget reforms enacted in 1974. That legislation shifted more control over the budget from the president to the 535 members of Congress, and added numerous complexities, including the Congressional Budget Committees, which are layered on top of the existing centers of fiscal power in the Appropriations, Ways and Means, and Finance Committees, but have no real power.

Most budget experts from both parties agree that the 1974 reforms have made the budget process weaker, less predictable, less capable of reconciling competing demands, and more prone to fiscal crises. Prior to 1974, the federal government had never ceased operations for lack of funding. Since then, it has “shut down” 22 times, completely or partially, and there have been only four years in which Congress passed its annual appropriations bills on time.

The main problem with the debt ceiling is that it is being used as a forcing mechanism to tackle resource allocation because of the failing budget system. In my view, the debt ceiling should be aligned with the annual budget process, so that it increases in parallel with government spending. The Bipartisan Policy Center’s proposal is along these lines.

 

Q: Getting back to a world of more rational budgetary policymaking requires serious change. What can be done to achieve this?

Serious budget reform requires a bipartisan effort. This is long overdue and requires a high-level commission that can look at revenues as well as expenditures. Although this didn’t work in 2011, it came close, and we need to try again.

On the spending side, the federal government will run more smoothly if we switch more departments onto a two-year budget cycle. The Department of Veterans Affairs already has such a biennial budget to protect veterans hospitals from continual funding uncertainty, and this would be a simple way to help agencies plan better and to lessen the glut of wasteful year-end spending. We also don’t use basic effective budgeting tools, such as cost accounting and capital budgeting, which help to control costs.

I also believe we must tackle spending on overheads and private contractor profiteering that is rampant, especially in the military. The Pentagon has such poor accounting that it has flunked its audit every year for more than 30 years. Many experts, including former Defense Secretary Robert Gates (who argued that overheads were consuming up to 50% of Pentagon spending) and numerous GAO reports have identified savings and efficiencies that we are ignoring. 

But it’s critical to recognize that the national debt is the result of the imbalance between revenues and spending—so it cannot be reduced without more revenues. We need to consider that the last time we had a budget surplus was during the Clinton administration from 1998-2001, and it was achieved through a combination of higher revenues, lower spending, and a booming economy. Clinton raised income tax brackets, corporate taxes, gas taxes, and Social Security taxes, and he also cut military spending and eliminated some tax loopholes. There were huge fights with Congress, but eventually Congress passed the Balanced Budget Act of 1997, which retained Clinton’s original tax increases but cut capital gains taxes and reduced spending on Medicare and Medicaid.

Today the economy is shakier, entitlement spending is higher, and the military is harder to cut, so realistically, we can only aim to decrease the rate at which the debt is rising. But it requires the same formula—bipartisan negotiations to increase revenues and reduce spending.


Photograph by Kevin Dietsch/Getty Images

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