Government hits national debt ceiling

February 20th 2003 - Replaying a drama from last year, the government is once again bumping against the debt limit of $6.4 trillion and the Treasury Department has begun taking evasive actions to prevent an unprecedented default on the national debt.

Treasury Secretary John Snow informed leaders of Congress on Wednesday that the government would reach the borrowing limit on Thursday and he would begin pulling investments out of a $48 billion government pension fund to make room for normal public borrowing auctions.

In a reference to the looming possibility of a war with Iraq, Snow urged Congress to act without delay to raise the borrowing limit.

"I know that you share the president's and my commitment to maintaining the full faith and credit of the U.S. government, especially at this critical time," Snow said in his letter.

"Together we must continue working to enact an increase in the statutory debt limit as quickly as possible to avoid any negative repercussions at home or abroad," Snow said.

The drama was similar to one that unfolded last year as Congress finally raised the debt ceiling from $5.95 trillion to the current limit of $6.4 trillion on June 28, but only after months of debate and brinksmanship with then-Treasury Secretary Paul O'Neill having to resort to ever-more elaborate procedures to shift funds in order to clear room for necessary borrowing.

Republicans will push to approve the Bush administration's request for a higher debt limit, citing the need to protect the country's excellent credit rating. U.S. Treasury securities are considered the safest investment in the world because the government has always met its obligations.

But Democrats are certain to use that request as a chance to criticize President Bush's tax cut policies, which they contend have led to record budget deficits and the need for a higher debt limit.

Democrats and deficits

A group of conservative House Democrats promised to oppose any increase in the debt limit that was not coupled with a plan to deal with the rising deficits.

"Less than nine months after raising the federal debt ceiling by a whopping $450 billion, the Treasury Department is once again demanding a blank check from Congress," the Blue Dog Coalition said in a statement. "We will only do harm to our country, our economy and our citizens if the federal government continues to borrow and spend with no regard for the burden it places on taxpayers and generations to come."

Snow said the administration would begin making room for normal borrowing Thursday by not fully investing in the Government Securities Investment Fund, often called the G-fund. This fund, which totals $48 billion, is used by the government to credit earnings for federal employees' pensions.

Snow stressed in the letter that any investments taken out of the G-fund to make room for other government borrowing would be replaced with interest earnings once Congress passes a new debt ceiling. Congress currently is in a weeklong recess.

The government can take similar actions with other government funds and there is a possibility it could make it to April 15 when a flood of tax payments will bolster government coffers.

Last year, the administration sought an increase of $750 billion in the debt ceiling, hoping to avoid a second battle so soon in the new Congress. However, Democrats in the Senate successfully blocked that effort and the actual amount approved was a much smaller $450 billion.

This time, Brian Roseboro, Treasury's assistant secretary for financial management, said the administration is not asking for a specific amount, leaving that decision up to Congress.

In testimony last week, Federal Reserve Chairman Alan Greenspan said Congress should consider doing away with the debt limit, saying it "has never in my judgment been successful in doing what it is supposed to have been doing, namely constrain spending."

Roseboro said the administration agreed with that sentiment, citing a comment made by O'Neill last year when he called the debt ceiling "an abomination."

While the debate over the debt limit often grows intense, as a practical matter Congress would be very unlikely to allow government finances to reach a point where there would be the possibility of an actual default on any part of the national debt, given the effect that would have on the government's credit rating and future interest levels it would have to pay on its substantial debt.

The national debt subject to limit stood at $6.392 trillion as of Tuesday, just $8 billion shy of the $6.4 trillion limit.