The U.S. Debt Ceiling Impasse – Can It Happen Here?
There is presently an impasse between the U.S. Congress and the Executive about increasing the $14.3 trillion (U.S.) ceiling on federal debt. If no compromise is reached, it is estimated that the U.S. will exceed the debt ceiling by August 2nd and it will have to delay making certain payments in the current fiscal year until the ceiling is increased. This is a powerful tool by which Congress can hold the Executive accountable. At the federal level, Parliament used to have such a tool but it was quietly eliminated in the March 2007 Budget.
U.S. Debt Ceiling
Under legislation, there is a limit on the amount of debt (the debt ceiling) the U.S. government can issue. Debt subject to the ceiling includes virtually all of gross federal debt, consisting of all federal government securities held by the public as well as the securities issued to various government trust accounts. For fiscal year 2010, gross federal debt amounted to $13.5 trillion, of which $9.0 trillion was held by the public and $4.5 trillion by government accounts.
The current debt ceiling, which was approved in February 2010, is $14.3 trillion. With a deficit projected at about $1.5 trillion for fiscal year 2011, the ceiling was technically reached in May 2011. However, the Treasury has initiated a number of cash management measures, which should delay reaching the ceiling to early August. The President introduced legislation in May to increase the ceiling by $2.3 trillion to $16.7 trillion. He is currently negotiating with Congress on a package of tax increases and spending cuts to gain approval for this increase.
In times of annual deficits, the debt ceiling is another powerful tool that Congress has to effect potential changes to the President’s budget plan.
The Canadian Experience
Prior to 2008, the federal government, under the Financial Administration Act (FAA), had standing authority to refinance its market debt. The FAA also provided the government with non-lapsing borrowing authority, which at that time stood at $4 billion. However, the FAA required that the government get Parliamentary approval to undertake additional borrowing beyond its refinancing requirements and its non-lapsing borrowing authority. During periods of annual deficits and/or extraordinary financing requirements, the government would table a Borrowing Authority Bill with the budget for the upcoming fiscal year to seek Parliamentary approval for its increased borrowing requirements. This would go through the normal process for Parliamentary approval. As it was considered a “money” bill, the vote in Parliament was considered a “confidence vote”. The Bill became law prior to the start of the fiscal year.
In 1985, the Senate delayed the passage of the Borrowing Authority Bill for fiscal year 1985-86, arguing that since the Government had yet to table its budget for 1985-86, there was no current economic and fiscal context for the Bill. During periods of deficit financing, Parliament spent a considerable amount of time examining the Borrowing Authority Bills. During most years in which the federal government was in surplus, no Borrowing Authority Bill was required.
In the March 2007 Budget, the Government proposed to amend the FAA by removing the existing statutory limit on borrowing. It argued that since it was again undertaking borrowings for certain major Crown Corporations, it needed increased flexibility. This proposal was outlined on page 322 of the Budget Plan. The proposed amendment was contained in the Budget Implementation Act 2007 Bill C-29, which received Royal Assent on June 22, 2007. The Opposition, along with political and financial commentators, did not focus of this change. It was not until after the fact that the Parliamentary oversight consequences were raised by the Senate but by that time it was too late.
Although the Government indicated that improved and timely information would be contained in its Debt Management Strategy and the Debt Management Report, the government no longer has to seek Parliamentary approval for its borrowing requirements. This has seriously reduced the financial oversight responsibility of Parliament.