Debt Limit: Statutory Changes Could Avert the Risk of a Government Default and Its Potentially Severe Consequences

What GAO Found

The current debt limit process separates decisions on revenue and spending from decisions on debt. As a result, the government periodically runs out of borrowing authority needed to pay existing, legally committed obligations. The Department of the Treasury has used extraordinary measures, which can temporarily free up existing borrowing authority, and cash on hand to continue making payments. However, these resources are limited and eventually run out. Predictions about when the government will no longer be able to pay all of its obligations—the “X-date”—are inherently imprecise due to the unpredictable size and timing of federal cash flows. Consequently, last-minute negotiations on the debt limit can increase the risk of a default. Further, these negotiations do not directly tackle structural spending and revenue levels that contribute to the growing debt.

A default would disrupt financial markets, with immediate, potentially severe consequences for businesses and households. A default could also inflict long-lasting damage to the U.S. and global economies (see figure).

Potential Effects of a U.S. Default on Financial Markets and the U.S. and Global Economies

Why GAO Did This Study

To meet the federal government's borrowing needs, Treasury issues debt in the form of bills, notes, and bonds. These securities play a vital role in U.S. and global financial markets. Congress imposes a legal limit on federal borrowing, known as the debt limit. In recent years, when debt outstanding has reached the limit, extended congressional negotiations have frequently brought the federal government close to being unable to continue paying its obligations. If Treasury exhausts its borrowing authority and runs out of cash to continue paying government obligations, a default will occur. GAO prepared this report as part of its continuing efforts to assist Congress in addressing challenges related to the debt limit. This report examines (1) factors related to the debt limit that expose the U.S. to a potential default, (2) immediate consequences of a U.S. default for the U.S. financial system, and (3) longer-term consequences of a U.S. default for the economy. GAO reviewed academic literature and agency documents and interviewed agency officials, economists, and market participants from banks, money market funds, and rating agencies, among others.